When it comes to choosing between a veteran or a recently launched fund, wealth managers tend to prefer the known quantity than taking a leap of faith.
While an industry mantra is that past performance is no indication for future performance, a track record is an edge older funds have over their younger peers.
This is because it enables investors to check the pedigree of a manager and their team as well as how a fund has behaved across different economic cycles.
Vicky Drysdale, senior investment manager at RBC Brewin Dolphin, said, given the option of picking a brand new fund or someone that has been known for a while, she would choose the latter.
“We tend to have a bias towards established ‘veteran’ funds due to the ability to analyse past performance and the track record of the fund manager, alongside scrutinising its cost, size and style-bias,” she said.
In addition, some experts use past performance in their investment process on behalf of their clients. A by-product of this approach is that it indirectly casts out younger funds.
David Morcher, head of collectives at Avellemy, also looks for veteran fund managers, as his approach uses a fund screen, before the funds are pricked by the analysts.
The firm looks for management teams that have consistently delivered relatively strong risk-adjusted performance versus peers.
“This has historically led us to require a certain length of track record in a product in order to undertake screening, which has precluded us investing in very recently launched funds. With this in mind, we are biased towards products with a slightly longer track record and away from newly launched funds,” he said.
However, recently launched funds are more flexible and can therefore explore new investment ideas and methods with more ease. Moreover, they also need to build a track record, which means they cannot afford to rest on their laurels.
As a result, some consider younger funds to be the more attractive option.
Alex Paget, manager of the fund of funds team at Downing, said: “We are unashamed backers of smaller and younger funds. From an investment perspective, smaller funds are easier to manage than larger funds.
“Managers of smaller funds do not have capacity constraints and can move their portfolios with ease to capture opportunities. There is also the less quantifiable element of managers of younger funds wanting to build, rather than defend, their track records.”
Paget added that new funds play a “pivotal role” in the fund management ecosystem and that there could be systemic risk if investors are herded into a smaller pool of options.
He said: “I would point you to the Neil Woodford debacle to illustrate the pitfalls of investors moving en masse into a seemingly ‘safe’ multibillion pound fund. You may think the industry has learnt its lesson on this, but that simply isn’t the case.
“In a world of increasing red tape and mass consolidation, there is the danger that in trying to limit the chances of another Woodford-esque situation, this industry is putting even greater pressure on smaller funds and more investors at risk.”
Other suggested that the best recipe is to combine both established funds and disruptors in a portfolio to have a blend of stability and innovation.
James Penny, chief investment officer at TAM Asset Management, said: “Using large stable funds where appropriate can help ground the fund, whilst selecting young and innovative funds with a fresh approach to the geography or sector can add that all important ‘edge’ to a portfolio which can make all the difference to a clients investment experience.“
For Kamal Warraich, head of equity fund research at Canaccord Genuity Wealth Management, it depends on the cap size. He said that younger funds tend to be the better option for small- and mid-caps due to their flexibility. However, investors need a long-term track record of consistent dividend growth for large-caps or income funds.