Investors shouldn’t fall into the trap of following the crowd into large and popular funds, according to Rathbone’s David Coombs, who says that if they do their research, they can find interesting opportunities which have gone unnoticed by many. 
The manager, who runs a number of funds including Rathbone Strategic Growth Portfolio and Rathbone Total Return Portfolio, prefers to buy investment vehicles that grow modestly and have greater control over their capacity.
As such, he typically prefers buying from smaller fund groups that have less mandates, less money under management and therefore a greater focus on their products.
“A lot of people think that boutiques or small groups are risky. You certainly have to do more due diligence from the outset but actually, all the evidence we’ve gathered shows that most of these types of funds in the Strategic Growth Portfolio tend to have lower volatility than the median fund in their respective sectors,” Coombs explained.
“Typically there’ll be one of only two or three funds that is run by the company, they will have much lower levels of AUM which allows them to be more flexible and to hold larger amounts in small- and medium-sized companies that often outperform on value and alpha.”
In the article below, the manager lists the under-the-radar funds that he currently holds in the £93m fund and what benefits they offer his portfolio.
Heronbridge is a long-only, valued-based equity management team based in Bath.
The five FE Crown-rated Heronbridge UK Equity fund, which is the only investment vehicle the business owns, has proven to be immensely popular among various fund managers including Momentum’s James Klempster, although it has now soft-closed to protect the portfolio performance and the size of the mandate.
“They’re ex-Mercury Asset Management team members from way back. They only run the one fund and it deals once a month,” Coombs said.
“They are very careful on managing the flows in and out of the fund to protect performance because they live and die by the performance of that one fund, so everything they do is focused on performance and not distribution so again, that’s the big factor you tend to find with these smaller boutiques.”
Since the £816m fund was launched 10 years ago, it has returned 206.24 per cent, comfortably tripling the performance of its peer average in the FO Equity UK sector. It has also achieved a top-decile alpha ratio, Sharpe ratio and maximum drawdown over the last five years.
Performance of fund vs sector since launch
Source: FE Analytics
Heronbridge invests in companies based on their investment merit as opposed to their size in a particular market index, and only buys into companies that are UK-based and are more than £100m in size.
The team uses both qualitative and quantitative research to gain an understanding of the companies they invest in and focuses on underlying earnings power in the hope that stock prices will begin to reflect that growth over the long-term.
Established in 2008 by Charu Fernando, Edgbaston Investment Partners specialises in Asia Pacific ex-Japan equities and is an employee-owned, long-only institutional firm. Their offices are in Houston and London.
“This is a boutique fund we’ve had for a long time. They had no UK presence when we came across them, it’s quite a small fund,” Coombs said.
“They have a very good track record in the institutional market, they had a SICAV in Luxembourg that was not a retail fund and we got them to convert it so it was able to be purchased by UK investors.”
Edgbaston uses a bottom-up value philosophy when selecting stocks and has a strong price discipline combined with a bias towards income.
The fund management house also focuses on the protection of capital throughout various market cycles, and does this by analysing business risk, balance sheet risk and in particular valuation risk of companies.
“It ticks the box of not being a massive retail fund, it limits its flows twice a month, it’s not heavily marketed on platforms and therefore we genuinely feel that funds that are not subject to huge leaps in AUM either positively or negatively – each are equally as damaging to performance at times,” Coombs added.
The four FE Crown-rated fund, which was launched in 2010, has more than tripled the performance of its peer average in the Off Mt Equity Asia Pacific ex Japan index to the end of October 2014, which is as far as our data on the fund stretches.
Edgbaston Asian Equity has a clean ongoing charges figure (OCF) of 0.75 per cent.
This £4.9bn fund is managed by Sean Lenihan of Goodhart Partners, an independent institutional investment manager with offices in London and Tokyo.
It currently runs two Japan funds – Michinori Japan Equity is a ‘best ideas’ portfolio and is a more liquid version of Hanjo Japan Equity, which is a SICAV that focuses on small- and micro-caps in Japan.
“Sean the manager is based in Tokyo and has lived in Tokyo for more than 25 years. He’s fluent in Japanese which I think is very important,” Coombs explained.
“He’s got a fantastic track record – his long-only [Michinori] fund is relatively new, we seeded it last year. Again, it ticks those boxes in a very similar way to Heronbridge. It’s totally focused, they’re not out on the road raising money all the time and they’re trying to let the performance drive AUM.”
Since its launch in August last year, Michinori Japan Equity has outperformed its peer group composite in the FO Asia inc Japan sector significantly, returning 7.3 per cent compared to its sector average’s 7.93 per cent loss.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Over the last year, the fund has also achieved a top-quartile alpha ratio, Sharpe ratio and annualised volatility.
It has a concentrated portfolio and adopts an unconstrained equity strategy. However, Lenihan believes that the most attractive investment opportunities in Japan are within the small- and mid-cap space, so Michinori Japan Equity has a significant bias towards these areas.
The fund has an annual management charge of 1.3 per cent.