Invested in a large fund that is starting to sink? Try a small but rising star

If a fund manager performs well, it won’t be long before the money starts pouring in from investors who want a piece of the action. The fund will grow enormously – sometimes to billions of pounds – and then something strange can happen: the performance is disappointing or even disappointing.

This may be because the fund manager is struggling to adapt to the new pressure to uphold its reputation. Or maybe they have to jeopardize their investment style now that they have a bigger portfolio.

Investors have an alternative approach to piggybacking on existing winners: they support a smaller early stage emerging fund. This can be risky and requires a leap of faith. But it can give investors the chance to grab early returns, which can be fantastic in some cases.

Takeoff: Investors have an alternative approach to piggybacking on existing winners: backing a smaller emerging fund early

Takeoff: Investors have an alternative approach to piggybacking on existing winners: backing a smaller emerging fund early

“The key is to invest when creating a track record rather than living,” said Rob Burdett, co-head of the multi-manager team at BMO Global Asset Management.

“The culture of star fund managers means that funds can grow very quickly once they’re in the spotlight and I think that generally leads to diminishing returns. That’s why it’s worth looking at smaller funds, especially if they’re already starting to do well.’

Of course, not all small funds outperform large ones, but they are often worth considering. Mick Gilligan, partner at asset manager Killik & Co, agrees. He says fund managers have the most to prove in the early stages, as their fund will not survive if performance falls short. “This is a great incentive for the manager to perform well in the beginning,” he adds.


Small fund managers can generally invest in companies of all sizes, where they see the best opportunities. They can tap into smaller companies – which tend to grow faster – as well as larger ones, which are more established.

But managers of larger funds may find themselves limited to investing in large companies. After all, when you have billions of pounds to invest, it can be difficult to find enough good small businesses to spread them out between. It may also not be appropriate to make large investments in small businesses.

If you’re considering investing in a fund with less than £150m in assets, find out why it’s so small. The manager may be new to managing his own fund. If so, research their previous experience and investment process and whether they have worked with household names.

Sometimes experienced fund managers start new funds. In this case, find out if they’re sticking to the style that has served them well in the past or trying something new.

When a fund manager changes tack, there is a risk that he will no longer play to his strengths. Hubris can step in after a period of strong returns, leaving a fund manager thinking they can ditch their tried-and-true strategy and outperform with a new one.

But just because they stick with what they know doesn’t mean they will remain successful. Investigate whether they have also performed well in different market conditions. You can find answers in the fund’s own literature or on the fund’s research websites, such as Trustnet.

Another reason a fund may be small is that it is shrinking. In that case, you probably want to avoid it at all costs. Perhaps dissatisfied investors are withdrawing their money after a period of disappointing performance, or a well-known manager has left. To find out if either is the case, Laith Khalaf, head of investment analysis at wealth platform AJ Bell, suggests looking at the fund’s annual report. This will reveal whether the units in the fund have risen or fallen over time.

If a fund becomes too small, its future is in jeopardy. “Small funds must remain viable or risk being shut down,” said Andrew Wilson, chief investment officer at asset manager Lockhart Capital Management. There are fixed costs associated with running a fund, regardless of its size. Larger funds can distribute these costs among more investors. But for smaller ones, the cost per investor can be higher.

Sometimes, however, asset managers will bear the additional costs for a new fund so that investors are not deterred. Some even offer reduced fees through an early bird share class.


So who are the potential stars of tomorrow? Lockhart’s Wilson lists Richard Penny’s Crux UK Special Situations fund as one to watch. Penny, who previously made a name for himself at Legal & General Investment Management, has built an enviable track record since joining Crux Asset Management in October 2018. His UK Special Situations fund, which is £103 million and focuses on undervalued UK companies, has converted an investment of £1,000 into £1,400 over this period.

‘Exceeding the £100m threshold should not slow performance,’ says Wilson.

Burdett of BMO highlights Jeremy Hewlett as another experienced fund manager at the helm of a smaller fund. Mirabaud UK Equity High Alpha is £68 million and has turned a £1,000 investment into just under £1,350 over the past three years.

For investors looking for opportunities outside of the UK, Burdett says the SVS BambuBlack Asia ex-Japan All-Cap fund is an overweight. The £48 million portfolio invests in the Asia-Pacific region (excluding Japan) and is managed by Jane Andrews, who has over 30 years of experience. As of August 2018, the fund has converted an investment of £1,000 into £1,400.

If a fund under £150m feels too risky, AJ Bell’s Khalaf says Schroder Global Equity Income could be an overweight.

The £263 million portfolio is managed by veteran Nick Kirrage. Performance was mediocre until last summer.

An investment of £1,000 three years ago would be worth £1,100 today. Since then, however, returns have been strong: a £1,000 investment in the fund a year ago would be worth £1,350 today.


Smaller investment funds, which are listed funds, can also offer opportunities.

Mick Gilligan of Killik & Co mentions ScotGems as an interesting option. Managed by Tom Prew, the trust has a market capitalization of £40 million and invests in small companies in emerging markets.

“It has struggled since its launch in June 2017 as it took a long time to invest its capital and then it was hit by the pandemic. However, it has a very capable management team at Stewart Investors, a strong board that is heavily personally invested and the latest annual report is encouraging to read,” he says.

Over the past 12 months, the trust has converted an investment of £1,000 into £1,300. Another attraction is the share price, which is currently trading at a 19 percent discount to the value of the assets in the portfolio, at 75.5 pence.

Investors in smaller trusts should be particularly careful about fees. First, ongoing charges tend to be higher than for larger peers and discounts are not always available.

Second, stock prices are quoted with a ‘bid or buy price’ and the ‘bid or sell price’. The difference between the two, also known as the bid-offer spread, can be large for smaller mutual funds (where the buy price is much higher).

If there is a large bid/ask spread, you may need to hold the investment longer to justify the entry costs.

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