Business & Investment

IW Long Reads: Rethinking Itching for 3 Years

In 2020 alone, there are an astonishing 1,477 new UCITS and ETF vehicles available to UK investors, surpassing the number of closures (1,014) over the same period, according to recent Morningstar data.

Not surprisingly, ESG is the story of the year, with nearly half of the new funds having a sustainable mission.

A long-standing question that advisors have faced with new launches is how long to wait before investing.

One of the old sayings used by many advisors is to wait for the fund’s third anniversary. But is this concept obsolete, or is it more important than ever in such a volatile market?

Last November, BMO’s Universal Multi-Asset Portfolio (MAP) range celebrated its third anniversary, while the Universal Sustainable MAP range exceeded one year in December.

With returns of 22.83%, 22.24% and 20.13%, Universal MAP Growth, Balanced and Koscious Funds are all the first quartiles of the IA Volatility Managed Sector in the three years to December 18, according to FE Fund Info. It is a number, which comfortably exceeds the sector average profit. 12.62%.

Any measures?

Robthorpe, mediator of BMO Global Asset Management and head of distribution in the UK and Europe, said these early profits cast doubt on the habit of waiting for investment.

“I’ve long argued that the three-year track record required before a fund gets a rating, and often before an advisor recommends a strategy, is at best arbitrary,” he says.

“Often this caution keeps advisors and their clients out of interesting investment opportunities and returns that exceed potential benchmarks.”

Protecting investors is important to Thorpe, but he argues that investors should be given the option and opportunity to invest in a well-performing strategy, regardless of when it was launched.

“What is the difference between one-year, two-year, and three-year performances based on the fact that past performances do not guarantee future returns?” He asks.

“If a new strategy is implemented by a trusted asset manager and has a known team, proven investment expertise, and a compelling investment strategy with an external background, evaluate and consider it to investors within three years. I think we need to do it. “

So how have Sustainable MAP funds been built up since the first year? Sustainable Universal Map Growth, which belongs to the IA Volatility Managed Sector, also performed best in the sector with a return of 14.21% in the last 12 months, and Sustainable Universal MAP Balanced ranked 4th (up 13.87%) and Sustainable Universal MAPCautious. Is the 7th best performer with a gain of 12.04%.

Thin red line

Investment performance is clearly important, but especially during times of turmoil, such as those experienced in 2020, Rob Hillock, Senior Financial Planning Consultant at Broadstone Corporate Benefits, said when assessing whether to invest in clients. He states that the data needs to be placed within various other elements. ‘Money in the fund.

“The rule of thumb of waiting three years before using a fund should really only be seen as a starting point, not necessarily as a red line,” he says.

“For example, if a” new “fund is launched by a well-established manager who can demonstrate outstanding performance in the market, should it be rejected from the proposal until it shows three years of performance? Do the same rules apply? Are you heading the fund for the first time to a relatively unknown manager? “

In the case of Khilok, due diligence to the manager’s background should be considered along with performance before rejecting the fund due to lack of performance data.

Such considerations include whether they were part of a larger research team with a different philosophy than the new fund, what motivated the new fund, how the billing structure is different, and so on. ..

“Similarly, is three years enough?” He adds. “Looking at the numbers through a set month / year prism, it can have a significant impact on production, and it’s easy to say that funds should only be considered after enduring at least one global business cycle. I can insist on. “

Look at the big picture

Like Hillock, Ryan Hughes, head of AJ Bell’s active portfolio, does not have a normative filter in the investment process that requires a fund to have a certain length of performance before it can be considered. Hmm.

“Instead, we look at the career performance of the manager to determine his ability to deliver alpha in the long run,” he says.

“Most of the time, managers are implementing other strategies before launching a new fund, so we see it as a reference point for our research.”

Taking Artemis’ US team as an example, the team moved all at once from Threadneedle to launch the same product suite.

In this case, Hughes argues that there is no benefit to considering these new funds if they use the same process and operate under different brands after waiting for three years of performance. To do.

“The Artemis USSelect fund has surpassed the S & P 500 index by nearly 30% in the first three years, and many investors will miss this,” he says.

More recently, Hughes said he invested in the Telworth UK Small Companies Fund, managed by Paul Marriage, just one month after launch.

“The marriage took advantage of the operations of the Cazenove and Schroders Smaller Companies fund, which made it very comfortable to invest in the new fund he set up in the new company.

“The additional benefit of joining the fund early is often lower fees, which can have a significant impact over long holding periods.”

Hughes says there are several benefits to wanting to see evidence of fund manager skills if it is a brand new product or has no previous track record of being tested by fund managers. But in reality, they are likely to be featured in his research process, he adds.

“But the investment research process is time consuming, so I respect that some investors need a hard filter in their investment process as a way to reduce their investment universe.”

Early days

IBOSS Investment and Managing Director Chris Metcalfe is another fund buyer who believes the three-year maxim is outdated.

“There was no benefit to waiting three years to invest in the fund or any other period of time. In many cases, the early years are best for the fund and are limited by either the lifetime or size of the fund. There is no fund. “

Metcalfe points to the Miton European Opportunities fund as an example. This is a fund that has been invested since January 2017.

“We are familiar with managers in previous roles, both with a proven track record in both up and down markets,” he says.

“I feel that understanding the manager’s process and investment style is more important than the age of the fund.

“Given our knowledge of Miton’s work practices, we expected Carlos Moreno and Thomas Brown to thrive in the new environment, and this proved to be the case. The last four years have been the most successful, with about 300% returning. Was the IA European sector.

“When I met the manager, I had less than £ 80m, but now I’m over £ 2bn.”

How about a group launching a new fund, such as a thematic offering, or more recently an ESG or other responsibly invested fund?

Given that this is a smaller universe, Metcalfe says he is even less likely to wait three years. “If important data is limited, work on the fundhouse, ESG credentials, and the track in front of the manager. Records.

“In our experience, there seems to be an increasing number of team-based approaches in the ESG space. More passives are entering the ESG space. No track record is needed here. Only benchmarks and OCFs. Get used to fundhouses. Please give me.”

IW Long Reads: Rethinking Itching for 3 Years

https://www.investmentweek.co.uk/analysis/4025313/iw-long-reads-rethinking-the-three-year-itch-time-to-change-the-rule-on-waiting-36-months-before-investing-in-a-fund IW Long Reads: Rethinking Itching for 3 Years

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