Big is not always beautiful. This is certainly true of fund providers where size can be as much a hindrance as an asset. So, it comes as no surprise to find that smaller fund managers, with little public profile, are beginning to steal the limelight from their more illustrious peers.
So how do these new funds with low brand awareness and modest marketing budgets give the big boys a run for their money?
The answer is that as a new group or investment `boutique', the only real barrier to entry is performance. If a new fund produces startling returns, money will inevitably be directed towards it. The evidence is there and investors chase the best performers. All the advertising in the world from a fund provider will count for little if the fund turns out mediocre figures, and props up the bottom of its respective sector performance table. Improved access to information has helped to level the playing field for smaller and newly-launched fund groups. The arrival of the internet and fund supermarkets has meant names like Artemis, CF Odey, Solus, New Star and Liontrust are competing head-on with the likes of Invesco, Gartmore and Henderson.
Mr Motivator
Small groups are usually highly motivated to produce great performance. This is not always true of larger companies. A dinosaur of a fund provider with, say, 36 funds, may feel the priority is not to risk an outflow of money. They tend to take risks that are no different to their peer group. If the fund drops 10 per cent but its main competitors drop 10 per cent, then that is okay. Hanging onto the money is more important.
Also, when funds get to a certain size (around 200m [pounds sterling] plus), investment restraints begin to appear. Larger funds cannot take positions in smaller companies in the way a smaller fund can. It is harder to produce outperformance when the fund is restricted to efficiently-priced blue chips. A 200m [pounds sterling] fund taking a 5 per cent position in a company with a market cap of 20m [pounds sterling] would effectively be buying half the company, and inflating their own share price in the process.
We have increasingly seen a lack of interest in small caps from the big institutions. When a fund gets above 150m [pounds sterling] in size, that is when it gets very difficult to invest in really small companies. Smaller company funds from the likes of Artemis (124.56m [pounds sterling]) and Premier (7.65m [pounds sterling]) are far more nimble. This type of fund can invest in companies with market caps of, say, 10m [pounds sterling] or 20m [pounds sterling] -- and many of them do.
Problems occur when a fund grows because it is successful -- it becomes too large and loses its nimbleness. It is a case of economies of scale, if a UK smaller company fund has 250 small cap holdings and one stock goes up five times, because it is such a low percentage of the overall fund, it is not earth-shattering. If the same stock goes up five times in a small fund, it is Christmas.
Small is beautiful
So, why are these small `boutique' groups being set up? The main reason they have taken off is that experienced fund managers felt the constraints of the large investment houses too stifling. Often these high-profile investment gurus were promoted to levels where they were no longer doing what they enjoyed best -- namely stock picking. With an excellent reputation in the City and a couple of Bloomberg screens in a small office, a fund can be up and running with minimal start-up capital. A high-profile name could attract 20m [pounds sterling] from institutional investors to get the ball rolling. A leading name in fund management will also attract IFA and consumer interest.
New Star is a prime example of a boutique that has put together a team of `star managers'. John Duffield, formerly a star name at Jupiter, has already recruited heavyweight names to New Star -- namely Toby Thompson from Newton and Richard Pease and Alan Miller, both from Jupiter. Small groups attracting good managers have an added advantage in that managers are less likely to move if they have a freer rein to invest the way they like. In many cases, they have put a chunk of their own money into the project. Both Pease and Miller have put money into New Star -- another motivation plus. The group was only launched in 2001 so performance figures are not of much use, but such a high profile has attracted great interest. However for new fund launches in general, it can often be tough breaking into the market, principally because financial advisers are often wary of them.
Mark Dampier, head of research at IFA Hargreaves Lansdown, believes this is an unnecessary stumbling block. "Too many IFAs will not buy a fund unless it has a three-year track record or Standard & Poor's rating. This is crazy, especially when you consider that often the first three years are the best years and besides, many of these fund launches involve high-profile fund managers with impeccable track records. Regulation has made IFAs overly defensive."
Consumers buying into newly launched funds should be wary, however. Often these launches are at the wrong time, i.e. at the top of the market. It may be that a new fund shows a fresh approach to investing in a particular sector, but the flip-side is that it may be following a fad in the market. And if you get into the market late, you are effectively buying it at its highest. Asian tiger funds in 1992, emerging market funds in 1993 and blue chip funds in 1995, are examples of bandwagons that investors jumped onto far too readily.
Investors should do a little homework to avoid rashly parting with hard-earned savings. Martyn Page, investment researcher at Misys IFA Services, stresses the importance of understanding a manager's methods, especially when a new fund has no performance charts behind it. "Investors must understand how the money is managed within a chosen fund and the nature of that fund. If a fund manager makes it plain that they will not invest in technology, you can't accuse the fund manager of losing their touch if there is a tech boom and the fund fails to benefit."
THE EXPERT VIEW
Who do IFAs see as the unsung smaller group funds currently on the market?
James Dalby, head of research at Bates Investments, says:
"Artemis has done a good job in terms of performance with a reasonable fund range. I like the UK Smaller Companies, the European Growth and the UK Equity Income fund.
"Another group I admire is Liontrust, a small player producing good results. (Liontrust First Income has shown top quartile performance over one and three years.) Its followers will increase. I also like BWD UK Smaller Companies fund, and I think new players First State are ones to watch out for in 2002. Their biggest strength is their Emerging Markets fund, but the arrival of high-profile Derek Lygo from Dresdner should help to get the rest of the fund range back on track."
Martyn Page, investment researcher at Misys IFA Services, comments:
"I think Liontrust have a clear investment style. With the First Growth Fund and First UK Investment Trust, fund manager Jeremy Lang looks at where analyst attitudes on expectations of eamings are beginning to change. He then reacts and buys accordingly. He is shrewd and knows his market.
"Two CG's Zenith European Capital Growth is another fund I like. Set up in 2001 by Chris Garsten, formerly of Credit Sulsse and Charles Glasse (previously at M&G), it is a European Blue Chip fund. This small boutique is a safe holding. It is not going to produce a racy performance, but is clear in its focus and provides regular updates on its investment process. Finally, I would have to mention Mars Asset Management's Aurora investment trust, run by James Barstow. A good growth fund with a bias towards Ireland."
Mark Dampier, head of research at Hargreaves Lansdown, comments:
"We recommend Liontrust, in particular its UK Equity Income fund. We also like Artemis -- its UK Smaller Companies fund has caught our eye. And despite the fact that it is so new it has no track record, we like the newly launched New Star."
Anna Bowes, investment services manager at financial adviser Chase de Vere, argues:
"I am happy to recommend New Star funds, though I am looking for a wider range of funds than just UK and Europe. Managing director John Duffield knows how to run a company, and he has attracted a good team of fund managers.
"While I am not recommending them yet, I am also watching the newly-arrived First State with interest. They have a good Asia Pacific fund but, in general, I'd like to see them beef up their investment team a bit first. One name I would certainly recommend is Artemis, a well-run fund management team."
CF ODEY ASSET MANAGEMENT
Tel: 020 7208 1400
Established in 1991 by Crispin Odey, CF Odey Asset Management is Europe's longest-established long-short equity fund manager. The Odey team manages around $650m including a UK unit trust CF Odey European Trust and four hedge funds, including the Odey European Income and the Odey Lathom Global.
According to Odey, the team is not limited to any single style such as growth, value or technical. "We are pragmatic and picking the right style (as our analytical template) at the right time is fundamental to our process. We are not looking for a single, perfect, flawless, 100 per cent certain idea."
Odey believes the fund management industry is obsessed with short-term benchmark-relative returns, with little or no attention to risk.
In contrast, Odey is an investment-led business where benchmarks play no part in the construction of portfolios.
Fund Launch date Fund size (m [pounds sterling]) European Trust 1992 64.0
NEW STAR ASSET MANAGEMENT
Tel: 0845 608 8704
New Star is the much-publicised new investment management company, led by John Duffield, who founded Jupiter Asset Management.
The fund management style centres around the `freedom to perform'. Fund managers can operate without the corporate baggage carried by many larger competitors.
Duffield's philosophy is that star managers do not want to be told what companies to invest in and have buy-lists forced onto them. They don't like following an index benchmark, a herd-like approach to investing that compels them to hold shares they don't believe in. Proven fund managers should have freedom to back their own judgement.
The funds are currently restricted to UK and Europe, and investors are watching for the breadth of funds to expand.
Fund Launch date Fund size (m [pounds sterling]) New Star European Growth 20/07/2001 131.03 New Star UK Aggressive 20/07/2001 N/S New Star UK Growth 20/07/2001 165.09
FIRST STATE INVESTMENTS
Tel: 0131 473 2200
The sister company of Colonial First State in Australia, First State arrived in the UK two years ago. It rebranded in the UK, dropping the Colonial name. To increase its influence in the UK market, First State bought Stewart Ivory back in 2000.
It's market leading funds are the Global Health & Biotechnology Fund headed by Dr Joe Anderson, European Smaller Companies, Asian Pacific fund and Global Emerging Markets fund.
The company is looking to beef up performance and offerings within its UK and European funds. Big hitter Derek Lygo from Dresdner has been drafted in to take charge of the whole UK range.
The company plans to launch a British mid-cap fund in the early part of 2002.
Fund Launch date Fund size (m [pounds sterling]) Ptarmigan International Capital 07/03/1994 25.19 Scottish American 01/01/1972 426.1 Scottish Oriental Smaller Cos 29/03/1995 32.78
CLOSE FUND MANAGEMENT
Tel: 020 7426 4000
The Close Beacon Investment fund is popular with growth investors. The fund's forerunner, The Beacon Investment trust, was launched in August 1994 to invest in small, growing UK companies on the London Stock Exchange.
The trust was converted into an OEIC in December 1999, to allow new investors access to an area of the stock market that has the potential to produce long-term capital growth. It invests in a diversified portfolio of small company stocks, quoted primarily on AIM and Nasdaq, plus those traded on OFEX.
The fund's predecessor saw its value grow by 247.3 per cent since the launch of the AIM index, and it has outperformed both the AIM index and the Hoare Govett Smaller Companies index every year since. It has been in the first quartile of the smaller companies sector since its formation.
Fund Launch date Fund size (m[pounds sterling]) Close Beacon Investment 08/08/1994 39.0 Close European Escalator 19/06/1998 6.0 Close Far East Escalator 19/06/1998 2.0 Close FTSE Euro eTX 03/11/2000 2.0 Close FTSE techMARK 04/11/1999 52.0 Close UK Escalator 100 26/01/1996 41.0 Close UK Escalator 95 26/01/1996 22.0 Close World Escalator 14/11/1997 9.0 FTSE4Good UK 31/07/2001 1.0
SOLUS INVESTMENT FUNDS
Tel: 0161 214 6868
Solus operates in a different way to other small group funds, in that the management of its funds are contracted out to third-party managers. As a range of collective investments, Solus allows investors to take advantage of the UK and overseas equity markets, whilst reducing the risk involved.
The more aggressive Solus funds have had a rough ride of late but there has been a recovery. The Special Situations fund, which has shifted its bias towards smaller growth companies as economic forecasts brighten, has jumped to first quartile ranking over one month. Over the longer term it appears to be a good performer too, ranked top five by IFA Chase de Vere over three and five years.
Its UK Growth fund has also made up ground since the move to growth stocks post-11 September and interest rate cuts.
Fund Launch date Fund size (m[pounds sterling]) Solus Balanced Portfolio 22/02/1999 2.46 Solus Eastern Enterprise 31/01/1994 18.44 Solus European Growth 09/05/1989 7.48 Solus Growth Portfolio 22/02/1999 6.59 Solus High Yield Fixed Interest 26/06/1995 19.5 Solus Income Portfolio 22/02/1999 6.55 Solus Japan Growth 27/09/1999 1.06 Solus Technology Plus 31/03/2000 0.92 Solus UK Equity Income 19/05/1987 4.85 Solus UK Growth 15/09/1981 9.36 Solus UK Special Situations 01/02/1974 33.28
MARS ASSET MANAGEMENT
Tel: 020 7410 0025
James Barstow founded Mars Asset Management, a private company, in 1995. Mars currently manages 34 million [pounds sterling] on behalf of three investment trusts, including the Close Finsbury Global UK Equity fund and the award winning Aurora Investment trust.
Barstow began his career in fund management on the UK equity side at John Govett in 1981. By 1992 he had moved to River & Mercantile where he managed the R&M Extra Income Trust, which outperformed the benchmark by a considerable margin under his stewardship. In 1996 he founded Mars Asset Management and launched the Aurora Investment trust in March 1997.
Aurora won the S&P Micropal award for the best three-year performance to August 1999 in the UK growth category.
Fund Launch date Fund size (m [pounds sterling]) Aurora 13/03/1997 27.03
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