Earlier this week Dominic Johnson, founding partner of Somerset Capital Management, warned that many large fund houses prioritise asset-gathering over performance. Hollands says that investors should not overlook the sales-driven nature of the fund management industry which can often lead to funds being launched to take advantage of short-term financial or even cultural trends.
"It’s a very faddish industry," Hollands said. "Remember funds tend to get launched when the marketing side of the business sees an opportunity."
"Often one or two funds get some success in the area and the sales guys go back to their company and say 'we could do this'."
"That can be at the time when the investment case is weaker, because most of the institutional investors have gone in already."
Hollands says that climate-change funds and long/short "130:30" funds are recent examples of fads with dubious value.
"Climate-change funds faltered because, in tough economic times, people focus more on the bottom line," he said.
Hedge fund strategies, on the other hand, have fallen out of favour after the financial crisis and following a few years of poor performance for the sector.
Emerging market debt is one currently popular trend that Hollands warns investors to be cautious of.
Data from FE Analytics shows that seven retail emerging market debt funds have been launched since January 2011, many of them by the biggest fund houses in the UK market.
Hollands says that there is little reason for retail investors to consider them for their portfolios.
"Emerging market debt has become incredibly popular among institutional investors, particularly German and Nordic pension funds."
"The pension industry has been moving into bonds from equities and as yields have been squeezed, so emerging market debt is another step for them to take after government debt, investment grade bonds and high yield debt."
"A lot of products have been launched in local currency, but in these cases much of your return is going to be dependent on currency movements."
"These funds are going to be quite volatile as a result, that’s the concern. So you’re getting a yield that’s reasonable, but at some risk."
"That’s why we don’t use them on any of our client portfolios."
Some emerging market debt funds have had plenty of success in recent years, which may entice new investors.
The £1bn Threadneedle Emerging Market Bond fund is the best performer in the IMA Global Bond sector over five years, with returns of 94.85 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund is currently yielding 5.2 per cent, according to data from FE Analytics, and has 93.2 per cent exposure to the dollar, hedging away the currency risk that Hollands warns of.
Hollands says that investing in dollar-denominated debt helps to lower the annualised volatility on this fund to 6.3 per cent rather than the 8.5 per cent to 9 per cent that is more common on local currency emerging market debt funds and the 4 per cent to be expected from an investment grade corporate bond fund.
There are other options which have the flexibility to invest in the bonds of developed markets as well, which some investors may see as a compromise.
The £132m Templeton Global Bond fund, which has five FE Crowns, invests in sovereign and corporate bonds of both developed and developing markets.
However, it still has the currency risk, with only 32.95 per cent in dollar-denominated debt.
One current trend that Hollands thinks is better-founded is the wave of new emerging market and global income funds.
"Twenty years ago, dividends were a feature of the UK market, but now it’s starting to spread into other developed markets like the US."
"The US didn’t have a strong income culture, but it’s a step forward that they do, with the companies sitting on healthy cash piles."
"In emerging markets it’s a sign that they have become more shareholder-friendly. Corporates went through a restructuring after the Asian debt crisis many years ago, so governance standards have improved."
"In the past, a lot of those companies had high family representation on the board and weren’t as attractive to investors."
Six emerging market income funds have been launched since January 2011, according to data from FE Analytics.