For many investors, a minimum three-year track record is a prerequisite for considering a fund, immediately ruling out new launches.
While there is an argument for allowing managers to build up a track record, the magic three year rule should be qualified based on who is buying a fund. As a professional multi-manager, it is my job to understand managers and their styles and that knowledge should allow me to make a judgement call on new funds. The opportunity cost of missing three years of performance is potentially considerable, particularly given the calibre of managers launching funds in recent years.
In this new column, I will pick a sector each month and look at some of the newer funds available, primarily those yet to reach the three-year threshold. The task of selecting funds may be getting more challenging, with a growing universe of options, but portfolio construction is perhaps becoming more efficient.
When I first started managing portfolios, funds were considered a multi-functional tool. But with hindsight, they were a rather blunt tool, with long-term active funds used for exposure to market risk, investment style and alpha generation no matter what the time horizon. Product innovation has sharpened the tools available, with funds offering more efficient market exposure and investment style tilts through smart beta. This is the focus of this month’s column, selecting three recent launches in the European ex-UK sector.
Fidelity Index Europe ex UK Fund
Efficient exposure to the MSCI Europe ex UK Index is provided by this fund. Fidelity’s launch of a range of core index funds two years ago was a surprise.
To win market share in an established space, you either have to be different, better or cheaper. Fidelity seems to have chosen to compete on price and launched into the retail market with P shares, its lowest fee class, at 0.10 per cent a year.
To date the fund has raised nearly £150m, so the strategy is working. It has also seen annualised performance since launch on 22 January 2014 to 29 February 2016 of -0.1 per cent compared with 0.8 per cent from the index. It is not obvious from these numbers how well the managers have tracked the index – there are too many other factors to consider for the fund return to be simply benchmark performance less expenses. This requires further examination of the tracking process and is a reminder to fund selectors that all passive products are not created equal.
TM Sanditon European Fund
Judging by fund assets, £268m at the end of February, investors have wasted little time reinvesting with Chris Rice, who has reunited with former Cazenove investment colleagues Tim Russell and Julie Dean. For many years, they have offered investors business cycle investing, and while Russell and Dean looked at UK equities, Rice applied the approach to stock selection in Europe.
It has been a slow start. From launch on 25 September 2014 to 29 February 2016, the fund is up 0.1 per cent against 1.8 per cent from the FTSE Europe ex UK Index. However, Rice’s outperformance over the past 12 months demonstrates a key attribute of quality fund managers, the ability to preserve capital in falling markets. I often refer to this as “winning without losing” and it creates the opportunity for active managers to outperform over the long term. It is not often these days that long-term successful managers get to manage funds without serious capacity constraints.
7IM Europe (ex UK) Equity Value Fund
For many years, 7IM has been constructing and providing multi-asset investment solutions for clients and the launch of four equity-based strategies focusing on value investing in UK, US, Europe ex UK and emerging markets may seem a departure from this strategy. However, 7IM has been constructing proprietary baskets of stocks based on factor investing for many years and is now giving external investors the opportunity to access this smart beta proposition.
It uses a team-investing approach to apply its knowledge to build a portfolio of value stocks but at portfolio construction stage looks to avoid overexposure to other factors such as size or momentum. The fund officially launched in April 2015, although the factsheet shows a track record dating back a year earlier using internal numbers.
For wider adoption, 7IM may require patience as investors get more comfortable with the offering.
John Husselbee is head of multi asset at Liontrust