A look at all of the funds unearthed by last year’s research shows that just one product – Premier Diversified – has since managed to exceed £100m in size, with assets increasing from £71m in April 2018 to nearly £180m a year on.
One fund, Threadneedle American Extended Alpha, has seen assets fall back below the £100m mark after the firm shifted European holders to an offshore equivalent as part of its Brexit contingency planning.
The upside of this is that these funds remains unencumbered by liquidity problems, are still nimble, and may be able to more easily replicate past successes as a result. For intermediaries who back such funds, it also suggests these strategies remain unlikely to appear in rival portfolios.
At a time of competition for assets and Mifid-led transparency around costs and investment performance, they could provide advisers with a much-needed edge.
But there are several reasons to worry about these funds having yet to establish meaningful scale. For a start, funds that cannot generate economies of scale find it harder to deal with fixed costs. This can often result in higher charges, something that will drag on returns and lead to difficult conversations with clients. It may also prove difficult to trade in and out of a fund.
Another concern is that, in a time when the fixed costs of running a fund have risen, asset managers may simply close a portfolio that has failed to gather sufficient assets, or merge it into another product.
Minesh Patel, a chartered financial planner who runs some of the money under his remit but describes his firm as “pretty financial planning-led”, finds it hard to justify the time spent conducting due diligence on lesser-known products.
“I would look at something that is innovative compared with what’s available in that sector. But how much can you allocate to the new funds?” he asks. “How much are you going to use it, and how much due diligence is there to use it? It’s the opportunity cost. If you are going to use it frequently then I would say yes, but if it’s just a bit of an infrequent use, I have to ask if it’s worthwhile.”
Mr Patel concedes that he may consider taking on a lesser-known fund if it had an ethical slant. But even if he found a promising offering in this area, he says he would most likely use it as a complement to an existing core fund rather than as a building block for a portfolio.
Missing the boat
Intermediaries with a bigger focus on investment may be more willing to try new funds, and their ranks could grow in future.
