Recently I attended a very interesting industry conference that showcased mutual funds containing assets of less than £300m.
Strictly speaking, not all the funds represented were from boutique houses (a number of large and well-known fund groups were promoting some of their smaller, less well-known strategies), but there were a number of new and innovative mutual fund offerings on display.
The mutual fund industry in the UK is largely characterised by its homogeneity. Fund analysts, selectors, gatekeepers and multi-managers are skilled at highlighting the not-inconsiderable differences in style and factor biases, size and composition, which all contribute to the myriad performance outcomes we see in our performance tables. But to the average ‘mum and dad’ investor, however, one managed fund is pretty much the same as another.
Just as with any product, brand matters. In the absence of any other information, brand is a dominant factor in choosing a mutual fund. Investors might know of M&G or Invesco Perpetual because they see it on the side of a taxi. That makes a conversation between an intermediary and a client on fund choice much easier than it might be if the product were Mandarine Gestion or SVM, for example.
The fund market is also highly concentrated. Thomson Reuters Lipper data shows there are some 6,000 funds domiciled in the UK. That’s a lot, especially when considering the US market – three times the size of the entire European industry – only offers 8,000 funds.
However, despite having a relatively large number of vehicles on offer, around a quarter of the £990bn of assets in UK-domiciled vehicles lies within only 50 funds. That is quite an astonishing figure.
‘Blockbuster’ funds such as Standard Life Investments’ Gars, M&G Optimal Income or Invesco Perpetual High Income are household names to most of us, and there are another 200 UK-domiciled funds with assets in excess of £1bn each.
Concentration matters. Large funds take increasingly larger positions and hold more lines of stocks or bonds than smaller funds. That drives them closer to an index position, making sustainable alpha a more difficult proposition. Additionally, liquidity can become an issue if, for example, a huge fund suddenly needs to liquidate an entire line of stock in order to fund redemptions.
Small funds are attractive for many reasons. They are nimble; they can – especially in their formative years – outperform their benchmarks considerably; and they often seek investment opportunities that are ignored or overlooked by larger funds. They are a great tool for diversifying a portfolio that might contain an unintentional bias to, say, large-cap FTSE shares.
However, the barriers to entry for a boutique are considerable, and they need to be given a chance to thrive. Gatekeepers need to freshen up their approved lists of the same well-known names. Large platforms and providers should consider fund additions that, although they may carry some reputational risk, ultimately invigorate and refresh the gene pool for all investors.
