However, sometimes fund managers can be the victims of their own success because after a period of outperformance, more and more investors want exposure to their strategy – which can have an adverse impact on flexibility and therefore future returns, as a number of FE Trustnet studies have suggested.
With that in mind, we ask the experts which funds they think will be tomorrow’s star but are currently under the radar for most investors. The point being that if investors were to buy now, they would be holding the fund when it is at is most flexible AUM, therefore having a strong chance of outperforming as a result.
Fidelity Global Enhanced Income
Richard Scott uses Daniel Roberts and David Jehan’s Fidelity Global Enhanced Income fund, which has an AUM of just £9m, in his PFS Hawksmoor Distribution and PFS Hawksmoor Vanbrugh portfolios and thinks it will be one of leading lights in the global sectors over the coming years.
“I think it deserves to be a much bigger fund,” Scott said.
“Daniel Roberts has done a fantastic job so far and I think it is a real fund of the future. I’d imagine he will start to get a lot more recognition and, as a result of that, I think Fidelity Global Enhanced Income will become larger over the next few years.”
The fund was launched in October last year, over which time it has outperformed the IMA Global Equity Income sector with returns of 11.70 per cent. It is slightly down against its MSCI AC World benchmark, however.
Performance of fund versus sector and index since Oct 2013
Source: FE Analytics
It has also been less volatile and has had a significantly lower maximum drawdown figure, which measures how much an investor would lose if they bought and sold at the worst possible time, than the sector and index.
The portfolio doesn’t have a published yield yet as it was only launched a year ago, though like Michael Clark’s Fidelity Enhanced Income fund, which yields 6.4 per cent, Roberts and Jehan use call options to boost their income stream.
Fidelity Global Enhanced Income has an ongoing charges figure (OCF) of 0.62 per cent.
Kennox Strategic Value
James De Bunsen, manager of the Henderson multimanager range, says £334m Kennox Strategic Value fund fits the criteria.
One of the major reasons why De Bunsen thinks it will be much more of a household name is because star manager Angus Tulloch sits on the company’s advisory panel and the fund, which was launched by Charles L. Heenan and Geoff Legg in July 2007, is their only offering.
De Bunsen says Heenan and Legg are deep value investors and will build up cash if they don’t find enough opportunities.
“It is a global equities fund but they focus on capital preservation,” De Bunsen said. “They have disciplined valuation approach and have low turnover, which derives from only buying quality companies below their intrinsic value.”
“They are patient and wait for volatility to throw up opportunities.”
The managers explained their process in a recent FE Trustnet article.
Our data shows the fund has been a top decile performer in the IMA Global sector since its launch with returns of 70.69 per cent. That includes top quartile returns in the falling market of 2011 and a 6.38 per cent return in the crash year of 2008.
The fund is down 0.85 per cent year to date, but De Bunsen says the managers’ approach still works.
“Recent performance has been disappointing as they held Tesco and had some oil majors, but they are sticking with them believing that the investment case for both has not changed,” he said.
Kennox Strategic Value has an OCF of 1.14 per cent.
Evenlode Income
“I do think Evenlode Income, managed by Hugh Yarrow, could become much bigger,” Rob Morgan, pensions and investment analyst at Charles Stanley Direct, said.
He added: “It is already known to lots of wealth managers, and given the age and ambition of the fund manager could capture wider recognition too.”
Yarrow launched his five crown-rated Evenlode Income fund, which has recently been added to the Jupiter Merlin portfolios alongside CF Woodford Equity Income fund, in October 2009.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
The £200m fund has been the seventh best performing in the IMA UK Equity Income sector over that time with returns of 83.31 per cent. As a point of comparison, the FTSE All Share has returned 58.94 per cent over that time.
Yarrow also boasts top quartile returns and has beaten the index over one and three years.
It is a concentrated portfolio of just 31 stocks and Yarrow currently favours mega-caps, counting the likes of Unilever, GlaxoSmithKline and Diageo as top 10 holdings. It has a yield of 3.73 per cent and an OCF of 1.12 per cent.
Neptune UK Mid Cap
Sticking in the UK, Morgan also thinks the £270m Neptune UK Mid Cap fund could become a much larger vehicle in the future.
“I think Neptune UK Mid Cap, managed by Mark Martin, could do well. There are a lot of large mid-cap funds out there and if he keeps up his record of good performance then he’ll surely attract attention,” Morgan said.
FE Alpha Manager Martin launched the five crown-rated portfolio in December 2008 and it differs from most other mid-cap funds as the manager has a much greater emphasis on capital preservation. This is shown in the portfolio’s return profile.
It has been a top decile performer in the highly-competitive IMA UK All Companies sector since its launch with returns of 248.72 per cent, but more importantly, it has beaten its FTSE 250 ex IT benchmark by more than 40 percentage points.
The fund has kept up with index in rising markets, but has really shone when the market has fallen. For example, in 2011 when its benchmark fell 10 per cent, Martin delivered a 3 per cent return. It is also up 5 per cent year to date while the index is down 3 per cent.
Neptune UK Mid Cap has an OCF of 0.83 per cent.
CF Miton UK Value Opportunities
The final fund on the list is CF Miton UK Value Opportunities, which Gavin Haynes, managing director at Whitechurch Securities, thinks will be one of the most popular UK equity funds over the coming years.
The £115m fund is managed by George Godber and Georgina Hamilton and has already been considered a rival to the top-performing Schroder UK Opportunities fund, which had been managed by FE Alpha Manager Julie Dean up until last month.
Godber and Hamilton are value investors and this strategy has worked very well for them recently.
Since its launch in March last year, it has been the sixth best performing portfolio in the 270-strong IMA UK All Companies sector with returns of 25.06 per cent, beating the sector average by 16 percentage points.
Performance of fund versus sector and index since Mar 2013
Source: FE Analytics
It has also ground out a 4.53 per cent return in this year’s turbulent market, while the sector has lost 3.56 per cent.
CF Miton UK Value Opportunities is a multi-cap portfolio, but with a heavy weighting towards smaller companies. It holds 9.3 per cent in the FTSE 100, 31.3 per cent in the FTSE 250, 29.4 per cent in the FTSE AIM and 18.8 per cent in the FTSE Small Cap.
The fund has OCF of 0.94 per cent.