A lengthy track record should not be a prerequisite for investors before they buy into a fund, according to BMO Global Asset Management’s Kelly Prior, who says an emotional or financial commitment from the manager can be more indicative of future performance.
Many financial advisers will wait to see a track record of at least three years before they feel comfortable investing client money in a fund. However Prior, investment manager in the BMO multi-manager team, does not believe such a rigid approach is necessarily beneficial for performance.
Average holding periods of retail investors (1997-2017)
Source: Investment Association
“We don't need funds to have a track record,” she explained. “We’re non-consensus thinkers. We’re prepared to back people in the earliest stages.
“We’re very happy to seed funds: new funds, managers that have just been given a new mandate [and] young managers who have been given a mandate.”
Prior said history has proved that new managers and managers of new funds are often “hungrier” and as such have more skin in the game – investing more in the fund, whether emotionally or financially, pushing them to deliver positive performance.
“Suddenly, it becomes a very different risk,” the multi-manager added. “Think about it: this is about people making investment decisions and you've got everything to prove.
“They’re thinking ‘what's going to be the best mandate for me to prove that I'm good at my job?’ and you get the opportunity to sit down and design your own mandate.
“[If] you've got no assets apart from yours and a couple of other investors, you're going to be absolutely committed.”
One such example for Prior is the £967m Majedie UK Focus fund, co-managed by FE Alpha Managers James de Uphaugh, Chris Field and Matthew Smith, alongside colleague Imran Sattar.
This is an unconstrained strategy comprised of all four managers’ best ideas and as such they are invested personally and financially.
The fund was one of the first to be launched by the boutique in 2003 by founders Field and de Uphaugh following their departure from Mercury Asset Management (which was acquired by Merrill Lynch and later BlackRock).
Prior says it highlights the benefits of fund managers leaving a big business to set up on their own.
“Usually, the fund managers are the owners of the business, they need this work,” the multi-manager said. “I think that's an incredibly brave decision. You have to have a huge belief in your own abilities to actually do your job and perform because if you don't, it's your business [that’s affected].”
Since launch, Majedie UK Focus has made a total return of 442.11 per cent compared with 240.56 per cent from its FTSE All Share benchmark and 226.06 per cent from its average IA UK All Companies peer. The fund has an ongoing charges figure (OCF) of 1.12 per cent.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
As part of its bottom-up approach, BMO approaches new funds with the awareness it is sometimes investing people’s life savings. However, Prior said seeding funds and managers does not mean a compromise of its long-term, stable investment philosophy.
“We want to be doing a safe job,” she continued. “We’re not going to put granny’s last fiver into something [risky].”
“We are very much about finding good fund managers that will invest in good companies that will have that longer-term perspective and actually make good investment decisions rather than punting.”
One example of this is the $3.8bn, five FE Crown-rated Hermes Asia ex Japan Equity fund managed by FE Alpha Manager Johnathan Pines and deputy Sandy Pei.
Analysts at Square Mile Investment Consulting & Research describe Pines as an opportunistic investor “looking to invest where there is a valuation discrepancy between the market valuation and the team’s analysis of valuation”.
“Pines is also deeply aware of the potential loss for any investment and hence looks for a margin of safety before any purchase is made,” they noted, adding that the largest positions tend to have the lowest downside risk.
The analysts said that the strategy does require some patience as it can take some time to pay off.
Hermes Asia ex Japan Equity has made a total return of 148.68 per cent since launch in November 2012, against 72.23 per cent for the average IA Asia Pacific Excluding Japan sector peer and 72.26 per cent for the MSCI AC Asia ex Japan IMI index. It has an OCF of 0.83 per cent.
Additionally, Prior said that backing new strategies can also add diversity to portfolios as some investors will always end up following in-favour funds.
“Don't buy the funds everybody else is buying because, number one, you perform like everybody else,” she said, adding that in her experience, funds perform at their best in the early years of their existence before they are weighed down by corporate mandates and expectations.
One example of a brand-new fund where the manager has committed his own money is Artemis US Extended Alpha.
Prior said the fund, run by FE Alpha Manager Stephen Moore, is an example of when buying cheap in the US market is not the best option, adding that the slightly higher OCF of 0.85 per cent is justified by outperformance.
Since launch in September 2014, Artemis US Extended Alpha has made a total return of 123.27 per cent, outperforming its S&P 500 benchmark’s 94.44 per cent gain.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
“It was only us and Stephen Moore that owned this fund at launch,” said Prior. “So there was no track record, no assets. There was nothing. And we went in and we seeded the fund.
“He decided how he wanted to structure his own fund and set his mandate. So, he has a vested interest in actually making this work.”
Along with the trend of supporting seeded funds run by a seasoned fund manager, Prior recommends backing the up-and-coming fund managers with no track record.
One of these she recommends keeping an eye on is Jack Barrat of Man GLG.
While he works alongside Henry Dixon on the highly rated £1.2bn Man GLG Undervalued Assets fund, FE Alpha Manager Barrat is sole manager of the £388.8m mid-cap Man GLG UK Absolute Value strategy.
Previously a trading book within the Man GLG Alpha Select Alternative strategy, in its first year the fund made a return of 12.1 per cent.
Yet Barrat remains off most investors’ radars, which Prior said is often the case with managers of new fund launches.
“To see the passion in their eyes, it’s exciting,” she said. “We don't have to wait until they've proved what they're doing. You can, but by then somebody else has benefited from that. Surely you want to get in there early doors?”
Prior concluded by saying that while such investments are rarely risk-free, backing managers and funds at an early stage can pay off.