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The pros and cons of investing in a young fund

11 May 2023

What investors should know before investing in a recently launched fund.

By Jean-Baptiste Andrieux,

Reporter, Trustnet

Choosing the right fund comes with a lot of parameters for investors to take into account. In addition to the charges or past performance for example, the age of the fund can be a crucial factor in the investment decision.

While past performance is no indication for future returns, it is still a reference point for investors – something new funds lack of.

James Penny, chief investment officer at TAM Asset Management, said: “One con of holding a newly launched fund is the lack of a track record from the vehicle itself and the management team behind it. There is no denying that experience counts for a lot in this market.”

New funds, however, have their own merits. To incentivise investors to entrust their money with the fund manager, asset management firms will sometimes consent to a gesture of goodwill.

David Morcher, head of collectives at Avellemy, said: “Asset managers are typically keen to grow new offerings and consequently might offer reduced fees for early or founder investors.”

It means that investors get a cheaper price than if they would buy a fund that has already experienced several periods of strong performance.

Vicky Drysdale, senior investment manager at RBC Brewin Dolphin, added that a founders’ share class is often offered to investors who buy the fund soon after it is launched.

This type of shares provide the holders with additional advantages such as a greater control in the distribution of profits or special voting rights.

However, being an early investor in a fund comes with risks attached, especially if there is a large company within the primary shareholders.

Kamal Warraich, head of equity fund research at Canaccord Genuity Wealth Management, said: “If a large firm, which is also the primary shareholder, had to take the bulk of the AUM out at any point in the future, they could damage the strategy quite badly. That selling process is going to be quite painful for the manager if they're the only large shareholder.

“The fund needs to gain traction so that major shareholders are diluted over time.”

While they are trying to gain traction, younger funds will also be more flexible than their older peers and have the capacity to deploy their capital to capture new opportunities without the risk of running into liquidity issues.

Drysdale said: “Smaller, less well-established funds have the ability to be nimble in less liquid investments, which they can use to their advantage as they may be able to move in and out of positions with greater ease.” 

More simply, buying a new fund can also be an opportunity to access new and innovative investment strategies.

What should investors check before buying a young fund?

A first thing investors can verify is whether an older international version or another fund with a related mandate already exists.

Penny said: “Many newly launched funds will have a paper track record, an international version with a longer track record or exist in a segregated mandate with which to conduct that longer and deeper due diligence into process, performance, correlation and risk taking.”

If a newly launched fund does not have an international version, the individual behind the steering wheel may not be completely unknown. In many instances, the manager will have cut their teeth with older funds.

Drysdale said: “A major consideration prior to investing in a relatively new fund is the track record of the fund manager. Their performance can follow them between funds due to their methodology, investment thesis and style bias.”

When the manager does not have any track record, Warraich said it is then essential to make sure they have the right credentials. For instance, has the manager been an analyst previously or done something similar for a long period of time?

Alex Paget, manager of the fund of funds team at Downing, considers “skin in the game” to be an important part of the fund selection process, especially for managers leading a portfolio for the first time.

He said: “Not only does this usually mean investing in funds where the manager is also substantially invested (and therefore has aligned interest), but it also captures the idea of a fund manager of a younger, smaller fund having something to prove rather than worrying about hurting their longer-term numbers and therefore ‘playing it safe’ (e.g. moving more towards the benchmark).”

Beyond the manager, it is also essential to check the nature of the firm launching the product.

Large asset management firms can provide support for an extended period of time after the launch, whereas the fate of a new fund can either make or break a boutique company.

Morcher added that it is also important to verify the amount of support the fund will receive from its asset management firm.

He said: “How many products do they tend to launch a year – is this one of many, or do they very rarely launch new products, which might suggest that they are more invested in the success of this particular strategy.”

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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.