IBOSS Asset Management has now launched its new range of fund of funds and Chris Metcalfe, who is an investment director at the group, says he and his team will maintain their policy of avoiding the largest and most well-known portfolios due to the concern that size ultimately affects performance. 
As well as running a white label model portfolio service for advisers, IBOSS has ventured into the world of asset management by creating a new entity and launching four OEICs – MGTS IBOSS 1, MGTS IBOSS 2, MGTS IBOSS 4 and MGTS IBOSS 6 which will sit, respectively, in the IA Mixed Investment 0%-35% Shares, IA Mixed Investment 20%-60% Shares, IA Mixed Investment 40%-85% Shares and IA Flexible Investment sectors.
The risk-rated funds invest in four core asset classes; equities, fixed interest, property and cash. The expectation is that each fund will typically invest in 35-40 holdings, with the asset allocation altering according to their risk mandate.
“The funds are designed as core holdings for clients’ ISA, investment and pension portfolios. They allow advisers to consolidate their clients’ investments within a tax efficient product and our reporting systems allow them to track the progress of these investments easily to ensure they are on track to meet their goals,” Metcalfe (pictured) said.
Metcalfe has been a regular FE Trustnet contributor over recent years and one of the main themes within his model portfolios was a move away from the industry’s giant funds, as the manager believes that very little positive can be taken from buying a portfolio with a swelling AUM.
In fact, he has a decent track record of selling once top-performing funds after their AUM has grown significantly, after which many have posted lacklustre returns.
These include M&G Global Dividend, Newton Asian Income, Schroder UK Opportunities, BlackRock UK Special Situations and M&G Recovery.
His concerns is that as more and more investors buy into a top-performing fund, the manager has to change his or her style accommodate inflows which, in turn, can dilute performance. As such, and unlike the large majority of multi-manager funds, Metcalfe won’t be holding multi-billion pound funds in his new range of OEICs.
“While you could say Neil Woodford is the exception, we haven’t really been able to find any examples of a fund’s performance improving as it becomes larger,” Metcalfe explained.
“Of course, many will only back funds after a period of outperformance but by waiting you can be missing out on returns. We will keep looking at smaller groups and funds and try to capture them in their growth phase.”
In this article, he highlights three lesser known funds he has been backing for a number of years but tend to go under the radar of a more traditional multi-manager portfolio.
SVM UK Growth – £138.3m
A good example of a fund which is largely ignored within this industry despite its stellar track record is SVM UK Growth, according to Metcalfe.
FE data shows the five crown-rated £138m fund, which is run by Colin McLean and FE Alpha Manager Margaret Lawson, has been a top decile performer in the IA UK All Companies sector over 10 years and has beaten its FTSE All Share benchmark by close to 90 percentage points in the process.
It is also ahead of the index and top quartile over one, three and five years.
Performance of fund versus sector and index over 10yrs
Source: FE Analytics
Despite this, its size means the fund only accounts for 0.08 per cent of the total assets in the sector and is more than four times smaller than the ‘average’ IA UK All Companies member. On top of that, just two funds in the whole Investment Association universe count the multi-cap portfolio as a top 10 holding.
“It never seems to amaze me how this fund doesn’t take on more assets,” Metcalfe said. “It has bene top decile under Margaret Lawson and while it can be more volatile, we use a blend of other UK funds to try and dampen overall drawdowns.”
As Metcalfe points out, thanks to Lawson’s focus on mid and small-caps relative to her peers, the fund has – at times – been more volatile than its average peer. That being said, thanks to SVM UK Growth’s outperformance in 2007 and 2008, it has one of the best maximum drawdowns and Sharpe ratios in the sector over 10 years.
Old Mutual Global Equity – £336m
Next up is the Old Mutual Global Equity fund, which is co-managed by Ian Heslop, Amadeo Alentorn and Mike Servent.
Metcalfe and his team have been long-term backers of the fund, which only weighs in at £336m despite its strong medium and long-term track record. According to FE Analytics, it is top quartile in the IA Global sector over one, three, five and 10 years and has beaten its MSCI World index in each of those time frames.
On top of that, it holds the title of being the most consistent portfolio in the highly competitive sector having beaten the sector index in each of the last six calendar years thanks to the manager’s approach, which is partly quant driven and blends different investment styles.
Performance of fund versus sector and index
Source: FE Analytics
However, the fund is around £100m smaller than the ‘average’ fund in the sector, its assets make up just 0.31 per cent of the sector’s total AUM and the only fund of funds to count it as a top 10 holding is run by Old Mutual Global Investors.
“Though Old Mutual is not a small firm, we went into this fund when it was just £25m. It was certainly off the radar of most investors but the performance has been tremendous. It is another example of where people have waited to see how the fund performs before they bought it and they have missed out,” Metcalfe said.
He added: “It has been a fantastic performer.”
Artemis Strategic Bond – £869.3m
While considerably larger than the two funds mentioned so far, Artemis Strategic Bond is still small in comparison to the biggest IA Sterling Strategic Bond funds as its assets only make up 1.49 per cent of the £58bn in the peer group.
Metcalfe has been particularly vocal about the outlook for giant bond funds in the past, telling FE Trustnet that he would no longer back fixed income portfolios that have grown to a size of more than £1bn due to potential liquidity concerns.
However, at the same time, he points out there are few funds in the sector which are small in stature but are still run by experienced managers, with most investors flocking to the most well-known managers in the space for their bond exposure.
Nevertheless, he says Alex Ralph and James Foster’s Artemis Strategic Bond fund – which is top 10 holding in just one fund of funds in the Investment Association universe – is an exception to the rule.
“In fixed income, if you haven’t had M&G or Invesco Perpetual on the name of a fund then you have struggled [to raise assets] over the past 10 years,” he said.
“The managers are very active and as we have a number of funds which are very short-duration, we haven’t got a huge amount of space for more mainstream bond funds. However, we like Artemis Strategic Bond as it is very active and will take punchy bets – which is a strategy that will have its good and bad days.”
According to FE Analytics, the fund has outpaced the sector over 10 years having beaten its peers in seven out of the past 10 calendar years.
Performance of fund versus sector over 10yrs
Source: FE Analytics
The fund – which yields 4.21 per cent thanks to Ralph and Foster’s high weighting to lower rated credit – is also top quartile for its risk-adjusted returns (as measured by its Sharpe ratio) and has a better than average maximum drawdown, alpha generation and annualised volatility.
