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The strengths and weaknesses of veteran funds

15 May 2023

What investors should be aware of before buying an older fund.

By Jean-Baptiste Andrieux,

Reporter, Trustnet

It may not be the first information an investor would look on a fund factsheet, but the launch date of a fund does matter, according to experts.

An industry adage is that past performance is no guarantee of future results, but experience is still an edge veteran funds have on their younger peers. It serves as a reference point for investors considering buying a fund.

Kamal Warraich, head of equity fund research at Canaccord Genuity Wealth Management, said: “You can't expect that return to happen again, but what you can expect with a certain degree of confidence is the same profile of performance.

“The track record is helpful for many different things, not just its own performance, but the way that the fund performs as part of a portfolio.”

A successful track record of a management team also means that both the parent company and investors can show more patience if the fund suffers periods of underperformance. After all, the management team has proven in the past it can deliver.

David Morcher, head of collectives at Avellemy, said: “This can (though doesn’t always) lead to greater stability of assets through the cycle, which makes it easier for the team to manage the fund and add alpha.”

Another benefit of veteran funds is that they will generally be larger in size as they have had more time to attract capitals from a pool of investors.

This can provide investors with a sense of comfort that they are buying a reliable product.

James Penny, chief investment officer at TAM Asset Management, said: “Some view herd mentality as a negative, but it can pay dividends to be in the middle of the pack with more experienced funds within a portfolio.”

This is an important factor for larger investors. As veteran funds are more likely to have scale, investors with more money are able to build a position without becoming the overwhelming owner of the fund.

However, the fact veteran funds are well owned across the market means that investors might not be adding additional value over and above competitors by using the product.

Moreover, a successful track-record can be a danger to the management teams as it may lead them to have excessive power and influence.

Morcher said: “Although a relatively rare occurrence, this can lead to a lack of sufficiently robust challenge and in the worst case an absence of adequate controls, as a business doesn’t want to risk upsetting a commercially successful team.”

A history of strong performance can also comfort management teams in their investment thesis for longer than it should. Yet, what has worked in the past and performed in previous economic cycles might not mean that the recipe will work in the future.

Vicky Drysdale, senior investment manager at RBC Brewin Dolphin, said: “The world is always changing, and markets are always evolving. Fund managers must be able to adapt to the new environment that they analyse and invest.

“Conversely, funds are regularly invested in for their specific models and the manager must be careful not to suffer from ‘style drift’ over time and rotate away from their area of expertise without reason.”

Therefore, adding an older fund that has performed well over a long period of time into a portfolio can mean that the investor is buying the fund at its peak.

Penny said: “Although not relevant to all veteran funds, an older fund that has performed very well for a number of years might be ‘due’ a period of underperformance, given we know that markets are typically cyclical and trends do not tend to persist in perpetuity.”

The size of a fund can also be a problem for veteran managers as the asset pools can become too large, which means that the managers may have to distort their original investment mandate to accommodate a much larger asset base.

Penny added: “In some instances this distortion over time becomes at odds with the investment mandate on the fund and one starts to see style drift creeping into the numbers.

“Larger funds sometimes have trouble delivering the same level of granular client servicing to match that of a smaller and more nimble funds.“

This capacity problem can lead to a soft closing (new investors cannot buy the fund) or even a hard closing (the fund does not accept any money at all) of the fund.

There is also a key-man risk with veteran funds, as the same person might have managed them for several decades.

Wallaich said: “People will eventually move on or retire, teams will change. That's an enormous risk and investors have to be aware of that.”

What should investors check before buying a veteran fund?

As with any fund, things such as strategy and cost must be considered as charges can impact the overall return, but there are some metrics specific to veteran funds.

Due to their age, there will be a greater volume of quantitative data for older funds. This enables investors to understand how a fund has historically performed, the consistency of its performance and in what markets conditions it tends to be successful.

The scale of the fund’s assets is another important detail to take into consideration to understand any liquidity issues that might arise.

Morcher said: “It is helpful to understand the composition of the product’s largest investors to understand if there is a risk in meaningful out (or in) flows of assets which could impact the manager’s ability to manage the fund and add alpha.”

He added that it is important to understand the commercials around the team’s product and its relative importance to the business.

Finally, shareholder alignment over the long term is another factor to consider. In other words, does the manager invest in their own fund and has their investment increased over time?

Wallaich concluded: “Consistency and alignment are really two good pillars for a veteran fund. You have to make sure that you've got those in place and then you can be quite confident in investing alongside the manager.”

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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.