When it comes to putting your money in a fund, many investors and advisers will wait for a minimum three year track record. However, Rathbone Unit Trust Management’s Mona Shah says doing so has led many to miss out on a fund’s strongest returns. She highlights the Prusik Asian Equity Income fund, which she says the multi-asset team at Rathbones invested in “on pretty much day one.”
“Investors who waited missed out on 60 per cent outperformance. If you waited three years you wouldn’t have had a chance,” she said.
Since launch in December 2010, the five-crown rated fund has returned an impressive 59.55 per cent, well ahead of the MSCI Asia Pacific ex Japan index, which made just 6.07 per cent over the period.
Performance of fund vs sector and index since 2010
Source: FE Analytics
However, if investors had sat back until the fund’s third birthday, they’d have only slightly outperformed the index over the last year, eking out 6.28 per cent while the index is up 4.33 per cent, according to FE Analytics.
Shah says that a manager has more flexibility to outperform when his or her portfolio is small and nimble.
The phenomenon is perhaps most prevalent in the small cap space, where liquidity is vital for outperformance. As smaller companies funds grow much larger, it is often more difficult for the manager to generate the type of outperformance they did in the early years.
One of the best performing UK smaller companies funds over the last decade – the four-crown rated Old Mutual UK Smaller Companies Focus portfolio – is a clear example of the value of buying in early.
The fund, headed up by FE Alpha Manager Daniel Nickols, has returned a whopping 685.45 per cent since launch in January 2002, smashing the performance of the IMA UK Smaller Companies sector.
However, investors who had waiting just three years to buy in would have missed out on more than 300 per cent. Since it turned three, the fund has returned 323.27 per cent, still well head of the sector and index, but the earliest years were particularly fruitful.
Performance of fund vs sector and index since 3yr mark
Source: FE Analytics
While the fund has continued to outperform, its returns over the last 12 months fell broadly in line with its peers, returning 24.07 per cent while the IMA UK Smaller Companies sector made 23.44 per cent.
Smaller companies aren’t the only area where investors can miss out on early gains, however, as shown by the four-crown rated AXA Framlington UK Select Opps fund, run by FE Alpha Manager Nigel Thomas.
Investors who had bought into the fund when Thomas took the helm in September 2002 were sitting on gains of 81.68 per cent in the first three years, significantly outperforming the FTSE All Share and IMA UK All Companies sector.
Performance in the following three year period was almost exactly in line with the index and sector, however.
Performance of fund vs sector Sept 2002 - Sept 2005
Source: FE Analytics
David Coombs, head of multi-asset at the group, says understanding the process of the fund and why you’re buying it, rather than trying to time the market or wait for a track record, is crucial.
He argues that manager track record is more important than a fund’s history when it comes to making the decision anyway.
Coombs adds that waiting three years sometimes means that an adviser and investor misses out on gaining access to the strategy altogether.
Top-performing portfolios such CF Miton UK Multi Cap Income, Marlborough Nano Cap Growth and the Prusik fund mentioned earlier all closed to new money within three years of closing. Some funds allow existing investors to add to their positions if they are already invested before a soft-closure, while others alert investors when limited capacity becomes available, Coombs says.
The trend of buying into a fund early isn’t fool-proof, however.
In the case of the PFS Chelverton UK Equity Income fund, turning up early doors would have been detrimental for investors. Anyone who bought in to the five-crown rated fund at launch in December 2006 would’ve been nursing losses of 32.47 per cent after three years. The FTSE All Share was down just 2.39 per cent over that time.
However, investors who’d stuck with managers David Horner and David Taylor would now be up 62.66 per cent, well ahead of both the IMA UK Equity Income sector and the index.
Performance of fund vs sector and index since 2006
Source: FE Analytics
Investors who had waited three years to buy in would be quite a bit better off, sitting on impressive returns of 140.85 per cent, more than doubling the returns of the sector and index.
