As a result of huge fund management groups’ long track records, high levels of assets under management and even bigger marketing budgets, most private investors and advisers will be drawn to their products when they are looking to build a portfolio.
Of course, there is nothing wrong with turning to the likes of M&G, Schroders and Fidelity as they all have funds and managers which have delivered consistent and substantial outperformance over the long term.
Just think of Richard Woolnough’s M&G Optimal Income, Andy Brough’s Schroder UK Mid 250 and Alex Wright’s Fidelity UK Smaller Companies.
However, while Callow – who manages the CF Seneca Diversified Growth fund and is outperforming his peers over the medium term – has the upmost respects for those groups, he prefers to back boutique managers with something to prove when he is building his portfolio.
Performance of manager versus peer group composite over 5yrs
Source: FE Analytics
He says a major reason he likes to provide capital for early stage and smaller firms is due to his and team’s experiences when they worked at Midas as they were small and were always “very grateful” when new money came into the business.
But, he says there is a more pragmatic motive to his preference.
“One of the main aspects is that performance is usually stronger,” Callow said.
“There is the old adage that your best idea is better than your 1,000th and the collegiate mentality of a partnership or small group helps focus the mind, but as a business expands the decision-making becomes diluted.”
“I hate to say ‘skin in the game’, but when the managers have their own money in the business or fund and the wolf is at the door, it is a virtuous cycle as they need to perform well – so everyone benefits.”
This inclination for boutiques is similar to the approach to that of the F&C duo of Gary Potter and Rob Burdett as well as David Coombs at Rathbones.
Callow says one of the best examples of recent years was when TwentyFour’s Mark Holman came to him with the group’s recently launched Dynamic Bond fund. Callow was looking for a vehicle to play the widening of credit spreads and the attractive valuations in the high yield space.
“They were taking a big risk, but we thought the investment case was compelling and the experience of the team was also compelling,” Callow said.
According to FE Analytics, the now five crown-rated fund has been a top decile performer in the IA Sterling Strategic Bond sector since its launch in April 2010 with returns of 49.72 per cent, beating the sector average by more than 15 percentage points.
Performance of fund versus sector since April 2010
Source: FE Analytics
The £690m fund, which yields 4.5 per cent, beat the sector in 2012, 2013, 2014 and is currently outperforming in 2015.
While there have been some less than successful purchases, Callow bought little-known funds such as Polar Capital Biotechnology, R&M World Recovery and Prusik Asian Equity Income at launch; all of which have gone on to perform massively well ever since.
The $40m Polar Capital fund, which is headed up by David Pinniger, is now the best performing portfolio in the whole IA universe since its launch in October 2013, considerably outperforming the better-known and larger AXA Framlington Biotech fund in the process.
Performance of funds versus index since Oct 2013
Source: FE Analytics
“We believed in David’s investment strategy and one of the positives is that he is starting with a clean sheet of paper,” Callow said.
The five crown-rated Prusik Asian Equity Income fund, which is now closed to protect the investment approach, sits in the offshore universe but its returns of 105.03 per cent since launch in December 2013 mean it has beaten ever portfolio in the IA Asia Pacific ex Japan sector.
On top of that, those returns are more than double the gains of the sector’s most popular names such as First State Asia Pacific Leaders, Newton Asian Income and Aberdeen Asia Pacific Equity.
The R&M World Recovery fund, which is still open at just £190m, is managed by Hugh Sergeant who has built up a decent long-term track record running portfolios with a similar styles in the UK equity space.
Our data shows it has been the fourth best performing portfolio in the highly competitive sector since its launch in March 2013 as its gains of 55.13 per cent are far greater than global funds managed by the likes of Invesco Perpetual, Standard Life and Aberdeen.
Clearly, these funds have already demonstrated significant outperformance and therefore Callow is now looking for boutique funds which he hopes can replicate those sorts of returns.
One he is particularly excited about is the Ocean Dial Gateway to India fund.
The manager is bullish on India given prime minister Narendra Modi’s majority victory last year and his pro-growth reformist policies. Callow thinks manager David Cornell’s small and mid-cap bias and experience within the Indian equity market will be very conducive to the current environment.
According to FE Analytics, the $70m fund – which sits in the offshore universe – has already returned 76.86 per cent since its launch in September 2012 while the MSCI India index is up 49.41 per cent.
Performance of fund versus index since September 2012
Source: FE Analytics
However, as the country’s profitability is finally being unlocked and as the fund is targeted smaller companies, Callow expects Ocean Dial Gateway to India to continue to deliver the goods. Its ongoing charges are quite high at 1.7 per cent, however.