Husselbee: Lessons from the Waiting Room

In his final Waiting Room column, Liontrust’s head of multi-asset looks back at 12 months’ analysis into funds with a track record of three years or less.

Over the past 12 months, we’ve delved into many of the Investment Association’s key sectors, reviewing recently-launched funds which may have escaped the notice of fund buyers due to their short-track records.

In this final column, we take stock of the many objectives, styles and approaches adopted by those at the helm of these funds, ask what appetite there is for these new kids on the block and review the lessons we’ve learnt along the way.

Given the vast amount of funds available within the IA’s varied sectors – more than 3,500 at the last count – why should investors consider those with a shorter track record for their portfolios? After all, there are plenty of vehicles with established track records and documented investment processes.

First, established managers launch new funds all the time, which gives investors an exciting opportunity to get in on the ground floor with big name investors. Neil Woodford is one obvious example here – few shied away from CF Woodford Equity Income at launch. Closer to home, our own Economic Advantage team launched the Liontrust UK Micro Cap fund in 2016 having spent over 20 years running Special Situations and UK Smaller Companies funds with the same process.

Second, in areas such as UK equity income where there is high demand, fund sizes can swell – so it’s worth perusing lesser-known offerings in the ever-important hunt for income.

But what themes have come to light over the past year? While reviewing the IA’s Global sector last month, we noted with surprise that growth fund launches outnumbered their income peers. This pattern was also reflected in the IA’s Asia Pacific sectors; while, at the time we reviewed the sector, new funds launched in the preceding three years represented a 10 per cent increase in sector numbers, only one fund launched in that time had an income focus.

This seems to run counter to investors’ supposedly intense “hunt for income” in an ongoing low-interest rate environment. Dare I suggest this signals an industry slow to respond to investor demand? Or perhaps, more innocuously, fewer income fund launches in the Global and Asia Pacific sectors simply reflects the fact investors feel safer deriving their income from closer to home.

Another theme worthy of note is the growing number of passive and smart beta funds being launched. The “rise of the passives” has been widely documented – and exacerbated in my opinion by headlines purporting to show the outperformance of these lower-cost funds. I would argue that these studies are too focused on the short term and often neglect to analyse a full investment cycle. This does not mean, of course, that passives don’t have a valuable place within a portfolio – many of my Waiting Room picks over the past year have included passive options – but to choose one over the other without discretion seems reckless.

As our series on seeking out these newer gems comes to a close, fund pickers might wish to look to the eclectic IA Specialist sector, home to all non-mainstream equity based funds, to get an idea of where future Waiting Room gems – and industry themes – may lie. Looking at the three years to 1 May 2017, funds with an emerging markets or Asia bent occupy the top decile of performers, while – as might be expected – those funds with particular exposure to Sterling languish at the bottom.

As readers will know, this is a mixed sector where comparison of one fund’s performance to another is as meaningless as comparing Phil “The Power” Taylor’s sporting prowess with that of Harry Kane. But while there is no obvious link between funds, this sector can be viewed as a large “waiting room” in itself, divvied up as it is into smaller categories of single country, sector, managed or thematic funds.

Over the course of the past year, this feature has demonstrated that, in spite of the large amount of funds available to investors, there is appetite for more. Product innovation has transformed the sector I have worked in for over three decades – and for the better. My view is that a wider choice for fund buyers should be welcomed as it leads to healthy competition and, surely, to more efficient portfolios.

John Husselbee is head of multi asset at Liontrust