Just a handful of funds make up a significant portion of the total amount invested each year in funds.
Several well-known funds’ rapid increase in size – due to large inflows - and their subsequent ability to continue to perform have come into focus in the past twelve months after a spate of soft and hard closures.
In fact, data from FE Trustnet shows four out of five of the bestselling IMA funds bought by investors for their ISAs in 2013 have underperformed compared to their sector averages.
Potter (pictured) says investors need to embrace greater change when looking for core holdings in order to make better returns and that discretionary fund managers often buy the same funds as each other.
“A lot of model portfolios are looking very similar. The FCA has even started to become concerned about size with the funds so called ‘funds too big fail’, 15 or 20 of these funds,” he said. “People are buying yesterday's funds for today's clients. You have got to buy tomorrows funds today.”
“If you have most of your money in popular core funds then that will produce pretty average performance leaving only a little bit left to generate returns. Instead you should think about it the other way.”
“Embrace new ideas; believe it or not Neil Woodford was a young fund manager once, developing his career.”
TwentyFour Income
This investment trust was launched in March 2013 and has significantly outperformed its IT debt sector since.
Potter says although the fund is relatively new, investors should not wait for further evidence of its potential to outperform.
“You are going to hear about them a lot more in the future and for those buying the fund in 3 or 4 years’ time it might be too late.”
It has returned 21.94 per cent compared to a sector average of 3.17 per cent, since it was launched.
Performance of fund and sector since March 2013
Source: FE Analytics
The fund is co-managed by Aza Teeuwen, Ben Hayward, Rob Ford and Douglas Charleston.
It offers exposure to debt largely through residential mortgage backed securities and collateralized loan obligations.
The former are securities created from mortgages and the latter can be created from a number of debt instruments, typically from larger businesses, and are sold on by the originators, the banks.
The loans are repackaged and sold in tranches, distributing the various risks and cash flows between each tranche.
It is currently yielding 5.1 per cent but sitting on a 5.9 per cent premium.
“People think have been think they cannot touch it until it has a three year track record and it ticks all their boxes.”
“However, box-tickers should beware because they have outperformed in just over a year by more than 20 per cent.”
Gravis Capital Partners
This £400m investment trust was launched in July 2010. The five crown-rated fund invests solely in the debt of Private Finance Initiative (PFI) projects such as the building of public sector schools paid for and hospitals with private capital.
“The fund has absolutely walloped it since it launched,” Potter said.
He says the fund carries a lower risk than other funds because it invests in quasi-government backed infrastructure projects.
“It is guaranteed, dependable and generates concessionary income for the longer term.”
Since it was launched it has returned 46.31 per cent compared to an average return in the IT Infrastructure sector of 33.04 per cent.
Performance of fund and sector since July 2010
Source: FE Analytics
It is currently yielding 6.5 per cent but is on a 14 per cent premium
BlackRock Asian Growth Leaders
This $48m fund, managed by Andrew Swan and Emily Dong was launched in November 2012.
Potter says he bought it four months after the launch and currently owns almost 50 per cent of the fund across the Navigator multi-manager range.
He says the fund has attractive bull and bear market characteristics making it suited to choppy markets and that the larger funds in its sector are being hit by below average performance.
Since it was launched, which was largely a torrid time for Asian equities; the fund has returned 28.53 per cent.
By comparison, the MSCI Asia ex Japan index – the fund’s benchmark – rose 9.19 per cent over this period.
Performance of fund and sector since October 2012
Source: FE Analytics
Blackrock Asian Growth Leaders is an offshore fund that has limited platform availability, although there is a share class with a $5,000 minimum investment
“You better watch out because BlackRock are coming in Asia,” Potter said.