Giant funds show up nimble rivals
The flexibility of small funds is seen as an advantage by many, but they have fallen short of their larger counterparts in recent years.
By Mark Smith, Senior reporter
Tuesday July 10, 2012
Giant funds have consistently outperformed their more nimble rivals over the last one and three years, according to the latest
FE Trustnet research.
Funds with more than £1bn assets under management have on average beaten their sector over three years in all of the 10 popular sectors included in the study.
Over a 12-month period,
IMA Strategic Bond is the only sector in the study that failed to show a pattern of outperformance from the giant funds.
The largest outperformance is in the emerging market sectors where there is less competition from smaller product providers and larger houses have a long history of conducting research.
Over the last three years a portfolio of
Global Emerging Markets funds with more than £1bn AUM has returned 55.58 per cent while the average fund has returned 37.64 per cent.
Much of this outperformance can be attributed to the dominance of funds such as Aberdeen Emerging Markets Equity and First State Global Emerging Markets Leaders.
In
IMA Asia Pacific ex Japan, giant funds have returned 64.36 per cent over the last three years compared with 41.64 per cent from the sector average.
Performance of giant funds vs sector average
Source: FE Analytics
UK equity funds have tended to be more aligned. Of the 24
UK All Companies funds with more than £1bn AUM, only 11 have beaten the average fund over the last three years.
Performance of giant funds vs sector average
Source: FE Analytics
Larger funds are often seen as being at a significant disadvantage compared with their smaller peers because of liquidity issues.
For this reason, most fund-of-funds managers, who also want the flexibility to trade quickly in and out of their holdings, often avoid mass-market funds.
"We usually opt for smaller funds because they tend to be run by boutique investment houses who we believe have more of a performance mindset and pay less attention to benchmarks."
"We don’t want to end up invested in a closet tracker," said
Simon Callow, lead manager of the
CF Midas Balanced Growth fund.
"Smaller houses also tend to be more open to negotiation with regard to their on-going management fees," he added.
However, with
FE Trustnet research showing that giant funds have outperformed across the board, the consensus view deserves to be revisited.
Obviously, funds that have a history of outperformance have attracted the most inflows and some of the funds included in this study have not had more than £1bn AUM for long, but the market has had its part to play in the recent trend.
The last one- and three-year periods have been marked by heightened levels of volatility and huge swings in sentiment.
"Large caps have done very well in recent years," said Callow.
"They tend to protect on the downside because they are naturally more stable and tend to have more defensive characteristics."
"Probably the best approach for most retail investors is to use a core and satellite approach with larger funds making up a large part of your portfolio to protect against market falls and smaller, more nimble funds around the edges to add some performance."
"We’re using Somerset Emerging Markets Smaller Companies to supplement our emerging markets exposure in this way."