Mixed fortunes for the latest raft of ‘trendy’ funds

Nightmarish market conditions in parts of 2009 have not stemmed the flow of product launches from the major fund groups. Since January, 83 new funds have opened to retail investors, according to Morningstar data up to August 24.

Of these, 14 are income-generating funds, reflecting the huge investor appetite for this type of product in the present low interest rate environment. A further five are absolute return funds, launched to capitalise on falling markets using their ability to short stocks.

The other newcomers span a wide range of asset classes, with recent offerings including American equities, best ideas, global emerging markets, Latin America, and strategic bond funds.

But does investor appetite for these types of funds really exist in the current climate? A cursory glance at assets under management reveals disparity between the various offerings.

As not all funds have yet submitted the details of their assets to Morningstar, it is difficult to work out a meaningful average. A random sample of three funds from well known providers that were launched in May shows they have been fairly successful at raising money. Ruffer Japanese has raised £81.9m in assets under management, Odey UK Absolute Return £54m and Artemis Strategic Assets £188m. The latter fund’s success was boosted by the return to the retail market of its popular manager, William Littlewood.

Funds that have had a bit longer to establish and promote themselves might be expected to have more under management by now. Of course the methodology is flawed, but choosing three funds at random that were launched in March, the assets are less impressive. Baring Multi-Asset has raised £8.6m, Standard Life UK Equity Recovery £11.14m, and SVM UK Absolute Alpha £19.8m.

Speaking to Fund Strategy earlier in the year, Robin Stoakley, the managing director of UK retail at Schroders, said he was expecting a quiet 2009 in terms of product launches. “There are slightly more [launches] than I would have expected. But I wouldn’t classify that as a phenomenally busy year,” he says. “There have been years where there were hundreds and hundreds of funds launched.”

Stoakley says there are two key reasons groups are bringing out new products at present. One, they are jumping on the absolute return bandwagon, and two, they are launching funds for managers who have recently joined, at a time when the industry’s talent is playing musical chairs in the job market.

There is even a crossover of the two factors, with the absolute return sector having more scope to expand given the number of skilled long/short managers migrating towards retail fund management. These refugees from the bombed-out hedge fund sector are looking for new money to run, and are now able to make greater use of derivatives in retail funds under Ucits III rules. Plus, their former investors may still want to invest in absolute return-type products despite being burnt during the credit crunch.

Justine Fearns, an investment research manager at AWD Chase de Vere, says there is appetite among investors for new products such as absolute return funds. However, many prefer to stick with established long-only vehicles with a track record.

Newer funds with few assets under management at launch may also have certain advantages. “If new, small and, in theory, nimble funds can perform better because they are not tied to investing in very large, liquid companies, they can be more pragmatic in their approach,” Fearns says.

“However, there is an awful lot to be said for larger, more established funds that have been through all sorts of market conditions and are still going strong, although they will have had their ups and downs,” she adds.

On the equity income fund launches seen this year from groups including Axa Framlington, Fidelity, Invesco Perpetual, and Standard Life, Fearns says asset gathering could be tough for these vehicles in a space that is already fiercely competitive.

“The thing with equity income is that there are very good funds in that sector, so [newcomers] would have to be exceptional to take money away from the established guys there. In the absolute return sector there is more to play for.”

Looking forward to 2010, consolidation in the industry looks set to continue at a rapid pace as groups merge away their small, uneconomical funds to rationalise and cut costs. This could pave the way for the introduction of new funds that are more relevant to today’s environment, and to investors’ post-recession risk profiles and priorities.

Stoakley predicts there will be a raft of income-seeking funds hitting the market in the coming year. “In future we will see more launches of products which aim to deliver income. With base rates where they are, this will continue to be key for investors.

“[Another theme will be] converting income to capital, using derivatives. You may see some interesting funds coming out over the next year to serve higher rate tax payers, when the higher 50% tax band kicks in in April 2010,” he says.

Email Hannah Smith at hannah.smith@centaur.co.uk with your comments on this article.