Younger or smaller funds can often be quickly dismissed by fund selectors or financial advisers, simply because they don’t “tick all the boxes”. Many, however, can still be compelling propositions - even if they don’t meet all the relevant criteria right away.
At Square Mile, we have a research process that allows us to identify such funds with potential – we call them Positive Prospects (P+). This rating is reserved for funds that have the potential to be awarded a full rating in our Academy of Funds, despite their present shortcomings.
So, how can you evaluate funds to find those with potential? Maintaining a flexible approach to assessments is key in identifying any developments or fund launches that may be of interest. Research Director, John Monaghan, outlines several considerations as part of this process:
1. Track Record
While the track record of a fund is, understandably, important, it shouldn’t necessarily be the sole determining factor. It can, and should, be balanced against other mitigating factors to avoid being overly restrictive. For instance, if a fund manager has a track record on any other strategy, it may not always be necessary to require a minimum track record for the fund being considered, even if it is a new launch. Or, if the manager does lack prior experience, a fund could still offer potential if they have at least six months as the lead manager for the fund.
Just because a fund may not be widely available on platforms doesn’t mean it lacks potential. So, by keeping funds that are not widely available on platforms within scope for interest, clients can still be made aware of usable ideas. Continual monitoring of platform availability is required to ensure that any developments (or lack thereof), are identified. The availability of share classes should also be considered.
Low levels of assets under management need not always be an immediate deterrent, with many still having potential. A flexible, yet practical stance needs to be taken when considering appropriate levels of assets under management for the specific strategy and associated costs, particularly for new or smaller funds. A qualitative assessment will often address these concerns.
One final factor to consider, when looking at the potential for a fund in relation to its assets under management, is a concentrated investor base. If there is a likelihood that it will diversify over time, it could still be an attractive prospect.
Another reason funds may still be compelling prospects is in cases where the team supporting a manager has undergone change, but the strategy remains appealing. Allowing a period of "bedding in" can keep the fund rightly on the investment radar. Similarly, a lack of non-investment resources, such as risk and compliance functions within boutique investment houses, doesn’t immediately or automatically dismiss a fund’s potential.
The above factors should all be considered against a qualitative assessment of the fund and the manager's capabilities. For Square Mile, conviction is built through face-to-face meetings with fund managers. The fund can then be monitored, backed by quantitative analysis conducted on a regular basis. Developments in the sector, performance and assets under management are always key milestones which may trigger a review. During a review, if the fund still hasn’t ‘ticked all the boxes’, it’s necessary to log how it has evolved over time.
By balancing track records, availability, assets, and resources, both advisers and fund selectors can make informed decisions while allowing flexibility for funds with potential. That’s crucial because, in the ever-evolving landscape of investments, dismissing younger or smaller funds based on a checklist alone may overlook their hidden power to shape the future of portfolios.
Visit our free-to-access Academy of Funds to read the latest research on all our rated funds.