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Evan-Cook: Why you should always be wary of investing in star managers

19 August 2014

The fund of funds manager at Premier reveals why he’s sold out of some of the UK’s most highly rated fund managers, including Schroders’ Paul Marriage.

By Jenna Voigt,

Editor, FE Investazine

Mass inflows, especially into funds that focus on the more illiquid areas of the market, make it difficult for even the very best managers to outperform, according to Premier Asset Management’s Simon Evan-Cook (pictured).

ALT_TAG The manager of the £372m Premier Multi Asset Distribution portfolio says that one of the most frustrating things about investing in funds is that the very best funds and managers generate a huge amount of media attention, resulting in significant inflows.

Larger funds find it harder to move in and out of stocks quickly – particularly at the lower end of the market cap spectrum – which in turn makes it harder for managers to replicate the strong performance that gave them the spotlight in the first place.

Evan-Cook compares it to a lifeboat effect after a ship has sunk – if the lifeboat gets too close the people left in the water climb on board and capsize it.

“It’s irritating because you do the work to find a good fund manager and then everyone jumps on board and it sinks,” he said.

Evan-Cook says there are several ways to protect yourself from this risk.

First and foremost, it’s important to find out from the manager how big they think it can grow when AUM is still small.

“When they’re running a fund of about £50m, you get a much more honest answer,” he said.

FE Trustnet recently enquired why the £1bn-plus JOHCM UK Equity Income fund was still open to new money, even though its prospectus claims its capacity is around the £800m mark.

Another sign a fund might be getting too large it how much it’s being talked about and highlighted by fund ratings agencies and platforms. Evan Cook also says that a raft of soft-closures in a sector could be a sign that funds of that type are taking on too much capital.

“It’s a reason to be cautious,” he said.

These concerns are behind Premier’s decision to drop a long-standing holding in star UK small cap manager Paul Marriage’s Schroder UK Dynamic Smaller Companies fund in favour of the much smaller Franklin UK Smaller Companies fund.

Evan-Cook and his team bought Marriage’s then Cazenove UK Smaller Companies fund when it was just £40m in size and said it performed very well for them.

However, as a result of mass inflows – AUM now stands at £958m – Evan-Cook says they were no longer confident that the fund would be able to perform as well.

“The fund grew to around £700m to £800 and he showed no sign of closing the fund. About a year ago we said thanks for the memories,” he said. “I really rate Paul Marriage. But even a great jockey, if you’re riding a Shire horse, you’re not going to win the race.”

Schroders has since closed the fund to new money. A spokesperson for the firm said: “As a result of strong inflows in 2013, and Schroders’ commitment to maintaining the integrity and performance of the fund, we closed the Cazenove UK Smaller Companies fund, managed by Paul Marriage and John Warren, in January 2014.”

“The decision to close the fund was taken to protect the returns that existing investors have seen in recent years and to ensure that the fund’s objective is delivered.”

The manager’s track record over the long term is stellar; FE data shows it has outperformed both the IMA UK Smaller Companies sector and the FTSE Small Cap index over three, five and 10 years. Over the last decade, the fund has more than doubled the returns of the index and nearly doubled the returns of its peers.


Performance of fund, sector and index over 10 years

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Source: FE Analytics

However, over the last 12 months, the fund has made less than half that of the sector and index and even over three years the fund has slipped into the second-quartile.

Evan-Cook believes Marriage is among the very best in the sector, if not the entire UK, but points out it’s just a lot harder for him to manage a multi-billion pound fund – especially as much of his success has come from investing in micro-cap companies.

The Franklin UK Smaller Companies fund, Evan-Cook argues, has much more flexibility given its smaller size.

He also likes the more concentrated approach taken by the fund’s managers.

Evan-Cook admits that the long-term track record of the £150.4m Franklin UK Smaller Companies fund is “terrible” because the previous manager Stuart Sharp had a very poor period between 2008 and 2012.

However, since FE Alpha Manager Paul Spencer and small cap expert Richard Bullas took over the portfolio in June 2012, performance has improved considerably.

The fund has returned 66.13 per cent over the period, compared to 59.7 per cent from the Numis index and 53.67 per cent from the sector average.

It has also marginally outperformed Marriage’s Schroder fund over the period.

Performance of fund, sector and index since 2012

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Source: FE Analytics

FE Alpha Manager Mark Hall joined the team as deputy manager in November last year.

In an article last year, FE Trustnet highlighted the fund as an alternative to the recently closed Fidelity UK Smaller Companies fund. The fund was initially slow to take off, though management explained that they were “quite brutal” in overhauling the portfolio, cutting 33 from the fund they inherited.

They decided to move away from the most illiquid micro-caps and instead focus on companies ranging from a market cap of £100m to £1bn.


The portfolio they inherited was also heavily weighted toward mining and gas companies, which the managers were quick to change. Now the highest sector weightings in the fund are to industrials, at 36.51 per cent, and telecommunications, media and technology stocks, at 16.97 per cent.

Franklin UK Smaller Companies has ongoing charges of 0.85 per cent.

Evan Cook highlights FE Alpha Manager Alex Wright’s Fidelity UK Smaller Companies fund, which was closed to new investment in April last year, as a good example of one that closes its doors at the right time.

Fidelity took the decision to close the fund when assets stood at £280m, even though many funds in the IMA UK Smaller Companies sector – including Marriage’s fund – are in an around the £1bn mark.

“We’re still invested in Alex Wright,” he said. “That’s an excellent example of how to manage capacity.”

Performance of funds, sector and index over 2yrs

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Source: FE Analytics

Fidelity UK Smaller Companies has kept up the strong performance that made it popular in the first place in recent years, delivering top quartile returns over one, two and three year periods.

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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.