There is much to be said for backing smaller funds.
All too often, in the world of investing, we see significant sums of money directed towards a handful of fund managers. Often this can be very rewarding: they a popular for a reason, which is usually good, consistent performance.
However, once a fund manager has built their track record and attracted billions of pounds, there is a risk that their performance then disappoints – only a very select few are talented enough to manage vast sums of money well.
Sometimes, unfortunately, it the popularity of a fund can also be just a result of good marketing, or an investment fashion that is being followed by many.
With this in mind, there are times when it can pay off to invest in a smaller fund, with assets of £200m or less. Below are five funds that we believe are small and beautiful.
Unicorn UK Smaller Companies
This £55.1m fund is small and flexible, backed by a clear investment process. It is a high conviction portfolio of around 40 UK smaller companies and manager Simon Moon looks for stocks with lasting competitive advantages, experienced management teams and strong balance sheets. All holdings must be profitable at the time of investment. A large proportion of research is performed in-house, which allows Unicorn to identify companies often missed by brokers.
Ashburton India Equity Opportunities
The team behind this £58.7m fund observe and analyse the economy first and form a view as to which areas offer the best opportunities for growth, quality and value. They then look for attractive companies in those sectors. While the fund can invest in Indian businesses of any size, the managers have little or no regard for the Indian stock market index itself, which is dominated by large companies: they believe that smaller stocks offer the strongest growth prospects.
Smith & Williamson Enterprise
The managers of this £150.4m fund look for high conviction investment ideas: companies with identifiable catalysts that could trigger a change in sentiment towards a stock. This change in sentiment could be positive or negative as they managers look to make money from rising stock prices (long positions) and falling stock prices (short positions). The fund therefore offers some downside protection in market falls and has a low correlation to the UK stock market.
Aviva Investors High Yield Bond
This £138.5m fund speaks to the income-hungry investor. It invests predominantly in UK and European bonds, and a minimum of 80 per cent of the portfolio must be invested in high yield bonds. The remaining 20 per cent can be allocated between investment grade bonds and cash. While high yield bonds carry a higher risk of default, this fund has not experienced a single default over the past three years, which is a testament to the manager's stockpicking skills.
TIME:Commercial Freehold
This £149.3m fund invests in commercial freehold property and ground rents and has a target yield of 4 per cent per annum. Commercial freehold property is let to commercial tenants for long periods: typically 15 to 40 years. Leases often have either fixed rental step increases, or index-linked increases built in. It is lowly correlated with equities and bonds so can also be used both as a diversifier and an alternative source of income in a wider portfolio.
While there are benefits associated with backing smaller funds, it is important to keep an eye on costs by checking a fund’s ongoing charges figure (OCF). This is because smaller funds can potentially be more expensive to run because there are less economies of scale.
Darius McDermott is managing director of Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.