Star managers are victims of their own success, according to multi-manager David Hambidge
, who says that giant funds are at a severe disadvantage to their smaller, more nimble competitors.
While the head of the Premier
multi-asset range acknowledges that some managers are better than others at running multi-billion pound portfolios, he is more comfortable holding funds with a larger investment universe.
"There’s no doubt that vast assets under management (AUM) are a handicap to investment performance," said Hambidge. "It’s rather like the best runners at the Grand National having weights put under their saddle – star managers have to contend with mass inflows, which are a drag on performance because they limit the number of stocks they can choose from."
has proven that it is possible to outperform with billions of pounds in the kitty; however, in general, I’m much more comfortable holding smaller portfolios that can invest right across the market cap spectrum."
The likes of Invesco Perpetual High Income
, which has £12bn AUM, struggles to hold anything other than FTSE 100 giants because even the smallest stake in a small cap firm would make Woodford a majority share holder. For liquidity reasons, this would make it extremely difficult for the fund to sell out of the company quickly.
"I haven’t held Woodford for nearly 10 years for this very reason," Hambidge said. "At the moment I hold the Chelverton UK Equity Income portfolio instead, which was only £7m in size when I bought it three years ago. Since then it’s performed very well indeed."
Both the Invesco and Chelverton portfolios have five FE crowns.
Performance of funds vs index over 3-yrs
Source: FE Analytics
David Horner’s Chelverton UK Equity Income fund's small cap focus enabled it to take full advantage of the 2009 and 2012 QE-fuelled bull market. As a result, it is one of the best-performing UK Equity Income
portfolios of the last three years.
According to FE data, the fund has returned 86.47 per cent since April 2009, outperforming Invesco Perpetual High Income by around 33 per cent. Woodford’s portfolio has marginally underperformed its FTSE All Share benchmark over three years, in spite of a stellar 2011.
Chelverton UK Equity Income's one-year historic yield of 6.43 per cent is almost twice as much as that offered by Invesco Perpetual High Income.
While Woodford insists that he has a preference for large cap defensive stocks, Hambidge says the manager would have his hands tied if his sentiment changed.
"It’s important to remember that Woodford wasn’t always a large cap manager," he continued.
Hambidge has also sold out of FE Alpha Manager Richard Woolnough’s
M&G portfolios in recent years, in favour of the more nimble £38.1m TwentyFour Dynamic Bond
"This is a far more punchy and volatile fund than anything under Woolnough, with far less duration, but this is why I prefer it," he explained. "Gone are the days where one had a choice between low-risk bonds and high risk equities – fixed interest has become so dislocated now that you need to take on more risk to achieve decent returns."
"Woolnough’s Optimal Income
fund is something that aims for this, but it’s grown in such a way that it’s starting to look a little stretched."
According to FE data, the £6.9bn M&G Optimal Income fund has been the best-selling in the entire unit trust and OEIC universe over the past 12 months, with inflows exceeding £2.7bn.
As of yet, Hambidge’s switch hasn’t paid off; M&G Optimal Income has returned 10 per cent more than TwentyFour Dynamic Bond since the latter was launched in June 2010, with less volatility.
Most recently, the manager has sold out of Schroder UK Alpha Plus in favour of IM Matterly Undervalued Assets due to liquidity issues.
"We like Richard Buxton very much, but at £3bn it was looking a bit large for its value focus," he said. "IM Matterly Undervalued Assets has a similar focus, but is that bit more flexible."
Since its launch in August 2008, Henry Dixon’s
£36.1m IM Matterly Undervalued Assets
fund has returned 39.1 per cent, compared with 26.12 per cent from Schroder UK Alpha Plus
IM Matterly Undervalued Assets has four FE crowns, while Schroder UK Alpha Plus has three.
Performance of manager vs peer group over 10-yrs
Source: FE Analytics
Hambidge is one of the most experienced multi-managers in the IMA unit trust and OEIC universe, after being appointed as head of Premier’s fund of funds range in 1999. According to FE data, he has beaten his peer group composite in seven of the last 10 years, but a dreadful 2008 means he has underperformed over five- and 10-year periods.
However, the manager has had a strong three years, delivering 44.42 per cent compared with 31.16 per cent from his peer group composite.