Skip to the content

Giant funds of the future

02 September 2014

In the first of a new series, FE Trustnet highlights funds with the potential to become industry leaders in the coming years.

By Joshua Ausden,

Editor, FE Trustnet

Managers with a proven track record across the cycle are popular with investors – and with good reason.

Past performance is by no means a guide to the future, but a process that has stood the test of time across a number of different market environments is a major advantage.

Following the herd is not without its drawbacks, however.

The best-performing funds tend to attract the most assets, which can have an adverse impact on flexibility and therefore returns – as a number of FE Trustnet studies have suggested.

Moreover, while the likes of Giles Hargreave, Nigel Thomas and Ian Spreadbury have made a stellar return on many billions of pounds worth of investors’ money, there is every chance these highly experienced managers will retire from the game in the coming years.

With that in mind, and for those looking to be trend setters rather than herd followers, FE Trustnet will attempt to identify up-and-coming funds that could one day top the AUM charts.


Majedie UK Income

John Blowers, head of Trustnet Direct, highlights FE Alpha Manager Chris Reid’s Majedie UK Income fund as a potential multi-billion pound portfolio, competing with the likes of Artemis Income, Invesco Perpetual High Income and CF Woodford Equity Income.

Although it was only launched in December 2011, the fund has already grown to over £500m, doubling in size over the past six months alone.

Blowers points out that most of this money has come from institutional sources and though Majedie does not actively market funds, he expects retail inflows to follow.

“Most UK equity managers categorise themselves as having either a ‘growth’ or ‘value approach’, or a mixture of the two. Reid’s process is something different, however,” said Blowers.

“The fund looks for companies that are actively trying to improve their businesses. This means that it may invest in companies deemed ‘cheap’ or ‘expensive’ by the market. It has made a little niche for itself in the sector.”

“It is genuinely multi-cap in its approach, but has much more capacity than the likes of Marlborough UK Multi Cap Income or Unicorn UK Income, which will always have a small-cap bias,” Blowers added.

Reid includes mega caps such as AstraZeneca and Rio Tinto in his top 10, as well as smaller FTSE 100 companies like Friends Life and Man Group, and FTSE 250 companies Direct Line and Phoenix Group.

Small and mid-caps have a 45 per cent weighting in the fund, while 15 per cent is invested in international companies listed outside of the UK.

The fund has made a strong start, outperforming its sector and benchmark in every calendar year since inception, with a similar level of volatility.

Overall, Reid has returned 75.38 per cent since launch, compared to 50.59 per cent from the IMA UK Equity Income sector and 45.75 per cent from the All Share.

Performance of fund, sector and index since launch


ALT_TAG

Source: FE Analytics


The manager says he is actively avoiding companies that have been “propped up” by quantitative easing, including bond-proxy stocks.

However, he thinks a sell-off could present investors with a compelling buying opportunity in some areas.

Majedie UK Income is cheap on a relative basis, with clean ongoing charges of 0.78 per cent.

It is currently yielding 3.73 per cent, and is available on most major platforms.

Reid and his team are popular with fund of funds managers Robin McDonald and Marcus Brookes who run the £1.46bn Schroder MM Diversity fund, and John Chatfeild-Roberts and team’s Jupiter Merlin range.


CF Odey Allegra Developed Markets


“A fund I think might fit the bill is Odey’s new long-only offering,” said Equilibrium’s Mike Deverell, in relation to the £341m CF Odey Allegra Developed Markets fund.

“I think this is a really interesting one to watch. James Hanbury’s [CF Odey Absolute Return] fund has done brilliantly well but is now closed to new money, but this long-only fund is that bit more flexible and could become very popular.”

“It’s not heavily marketed but [Odey] very much let the performance do the talking.”

CF Odey Allegra Developed Markets was only launched in June of last year, so has no meaningful track record to speak of. It has made a solid start, returning just over 20 per cent.

The fund has already amassed $341m in assets however, such is the reputation of Hanbury and his team.

It is global in its approach, currently holding around 50 per cent in the US, 20 per cent in the UK and 13 per cent in Europe. Major holdings include Goldman Sachs, Regus and Sky Deutschland.

Hanbury invests predominantly in long-only stocks, but can hold up to 35 per cent in bonds. He is currently all-but fully invested in equities, however.

The long/short CF Odey Absolute Return has been one of the standout portfolios in the UK in recent years, delivering returns of 172.05 per cent since its launch in mid-2009.

Performance of fund and index since May 2009

ALT_TAG

Source: FE Analytics

The long-only CF Odey Allegra Developed Markets fund is domiciled in Ireland. It is not yet available on many platforms, but this is likely to change in the coming months.

The fund has an annual management charge of 0.7 per cent, with a 20 per cent performance fee on top of that.


Evenlode Income

It sometimes takes years for top-performing boutique funds to attract meaningful assets.

ALT_TAG Unicorn UK Income and Trojan Income are good examples; despite delivering stellar returns through the 2000s, it wasn’t until 2010 that the money started flooding in. Fund flows tend to accelerate when assets hit the £100m mark.

Large firms such as Chase de Vere don’t even look at portfolios until they reach this size, and even some retail investors are wary of smaller funds.


One UK Equity Income fund that has recently broken the barrier is Hugh Yarrow’s Evenlode Income fund.

Only a year ago the fund was just £35m in size, but a huge mandate from the Jupiter Merlin team earlier this year has sent assets to £184m.

With the psychological barrier broken, and Chatfeild-Roberts a keen admirer, the fund is now well and truly in the spotlight, and inflows could well follow.

ALT_TAG

Source: FE Analytics

Yarrow (pictured above) prioritises dividend growth above all else, believing that it is the key to long-term outperformance from an income and total return perspective.

He has a very stringent process, only investing in companies that generate a high return on capital, have strong pricing power and intangible assets – ie good management, big brands and intellectual property. This leaves him with a universe of just 80 stocks.

The fund is the polar opposite of a benchmark-hugger, holding just 30 companies, including big bets in Unilever, Glaxo and Diageo.

Yarrow currently has a preference for large cap multinational companies, believing these areas are more attractively valued than mid-cap domestic cyclicals which had a stellar run in 2012 and 2013.

Performance of fund and sector since launch

ALT_TAG

Source: FE Analytics

Yarrow has been very effective at switching his exposure from small caps to large caps, contributing to his strong outperformance since launch.

The manager’s bias towards defensive companies has also led the fund to being less volatile than its peers, with a lower max drawdown.

Evenlode Income has clean ongoing charges of 1.12 per cent, and is currently yielding 3.64 per cent.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.