Lowcock (pictured), senior investment manager at the firm, believes holding "any more than three funds" run by a single asset management group in a run-of-the-mill portfolio can leave investors exposed if influential individuals at the firm get important macro or bottom-up decisions wrong.
Even if a group is strong in a number of areas, he recommends investors look elsewhere to ensure they adequately diversified. "You’ve got to be careful because a lot of firms have a house view, or like Newton, use a thematic process, which means there’s a lot of overlap in views," he explained.
"If you have a lot of exposure to one house, then your portfolio loses out from a diversification point of view because a lot of the funds will go up and down together. Any more than three in a portfolio, and I think you’re getting too much concentration."
"Someone like [John] Duffield at New Star was very influential, and you’ve got the same story elsewhere. At Artemis they use Smart Garp [a quantitative stockpicking programme], which didn’t work out too well during 2008 and 2009."
According to FE data, seven of the nine Artemis fund with a long enough track record were either third- or fourth-quartile performers in their sector in 2008. The same number were third or fourth quartile in 2009.
Among the worst performers were the Artemis UK Smaller Companies, Artemis Global Growth and Artemis European Growth funds.
Performance of funds and sectors 2008 to 2009
Source: FE Analytics
Lowcock also highlights Invesco Perpetual as a group that relies heavily on an individual – in this case, head of equities Neil Woodford.
There are four UK Equity Income funds run by Invesco Perpetual. While only two are led by Woodford, Lowcock says there is little point in holding more than one in a single portfolio, as there is a great deal of overlap between them.
Year-on-year performance of funds and sector 2007 to 2012
| Name | 2012 returns (%) |
2011 returns (%) | 2010 returns (%) | 2009 returns (%) | 2008 returns (%) | 2007 returns (%) |
|---|---|---|---|---|---|---|
| Invesco Perp - High Income | 7.67 | 8.99 | 10.94 | 9.81 | -19.42 | 6.97 |
| Invesco Perp - Income & Growth | 15.49 | 3.52 | 12.6 | 16.65 | -28.45 | 0.79 |
| Invesco Perp - Income | 7.69 | 8.59 | 10.29 | 10.55 | -19.94 | 6.87 |
| Invesco Perp - UK Strategic Income | 14.25 | 3.28 | 14.71 | 14.26 | -19.91 | 5.18 |
| FTSE All Share | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 | 5.32 |
| IMA UK Equity Income | 14.01 | -2.9 | 14.58 | 22.88 | -28.54 | -1.21 |
Source: FE Analytics
Woodford also co-manages the Invesco Perpetual Monthly Income Plus fund, which sits in the IMA Strategic Bond sector, as well as the multi-asset focused Invesco Perpetual Distribution portfolio.
Aberdeen has expertise in a number of different areas, but the hugely influential Hugh Young (pictured) runs the firm’s Asia Pacific desk, which is responsible for nine open-ended funds and six investment trusts. He is also consulted by Aberdeen’s emerging markets team, which is led by Devan Kaloo. Founder of Neptune Robin Geffen is the named manager on 11 funds run by the firm, and his views are influential across the entire range, which totals 34 portfolios in all.
A recent FE Trustnet study revealed that the firm has had a tough time of late, with many of its largest funds achieving bottom-quartile performance over three and five years.
Performance of funds and sectors
| Name | 1yr returns (%) | 3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| IMA Global | 23.57 | 31.63 | 28.07 | 114.93 |
| Neptune - Global Equity | 12.93 | 11.58 | -3.42 | 210.62 |
| IMA Mixed Investment 40%-85% Shrs |
17.83 | 27.57 | 25.23 | 97.59 |
| Neptune Balanced | 14.46 | 24.25 | 19.83 | 144.1 |
| Neptune Income | 17.88 | 35.99 | 29.7 | 141.55 |
| IMA UK Equity Income | 26.46 | 45.93 | 38.47 | 126.85 |
Source: FE Analytics
Even though some asset managers such as Schroders and Jupiter pride themselves on giving their fund managers total independence from any house view, Lowcock thinks investors should still be wary of holding too many funds run by them.
"Some managers are definitely given more freedom than others, but at the end of the day all of these houses have a certain culture, and you always get influential individuals who are listened to."
"Moreover, in order for these managers to get and keep their jobs, they need to be a certain type of individual who fits in with the house style, so you’re never going to get total independence. They’re like-minded people, which counts for a lot."
"To be honest, most fund houses specialise in one or two areas, so it shouldn’t be too difficult to look around."
Lowcock adds that the issue of single fund-house risk is particularly important for investors who like boutique firms, as there is added financial risk.
"When you’re talking about the big firms, it’s less about default risk and more about diversification," he said. "If the fund house did go down like a New Star, then of course there is an issue."
"For smaller firms, the risk of this grows for obvious reasons."
Among the most popular boutique fund houses with investors is Troy, which boasts two multi-asset funds, a UK equity income fund and a global fund.
The largest fund is Troy Trojan, which is run by chief executive Sebastian Lyon. All of Troy’s funds are cautiously positioned relative to their peers, and tend to target long-term outperformance with below-average volatility.
Performance of funds and sectors over 3yrs
Source: FE Analytics
Unicorn Asset Management is popular in the UK equity space. Four of the firm’s five funds are run by FE Alpha Manager John McClure. The one exception is Peter Walls' Unicorn Mastertrust – a fund of investment trusts.
Ruffer is another popular choice with retail and institutional investors. Industry legend Jonathan Ruffer is no longer involved in the day-to-day running of the Ruffer Investment Company, or its four multi-asset open-ended funds, but he still contributes to the firm’s strategic positioning.
Ruffer also has Japanese, Asian and gold portfolios.
First State is fast becoming one of the most popular fund houses among investors looking for emerging markets and global exposure, but with only 18 funds under management, it is still small on a relative basis.
It has an array of emerging market, Asia Pacific and global growth funds, and a number of more specialist portfolios in areas such as infrastructure and property.
FE Alpha Manager Angus Tulloch has been at First State since 1988, and is considered to be one of the most influential emerging markets managers in the business.
His process is again typified by strong outperformance during falling markets, and low volatility.
