Fund management conjures up images of imposing glass office blocks in the City; of banks of desks where there is a constant buzz of activity, the phones never stop ringing and traders sit eagle-eyed watching a dozen world stock markets on multiple computer screens. Yet for some of the most successful funds, the reality couldn’t be more different. Their managers are more likely to be secluded in their home offices, distracted by the family dog barking as they try to get to grips with a company’s results.
Some funds undoubtedly find having access to analysts and researchers all over the world improves their performance, but other outfits seem to thrive on limited resources. Adrian Lowcock, investment director at Architas, says: ‘Small teams shouldn’t be as effective as larger ones, given how much data and information there is to go through. But they are often forced out of necessity to be more ruthless in their approach and have a very clearly laid-out investment philosophy, which helps them filter out companies that don’t meet their criteria and not spend time looking at data that isn’t relevant to them.’
This approach, he says, tends to suit funds with distinct styles or those that focus on longterm investing, where the manager doesn’t make many changes to the portfolio or get bogged down in short-term data.
Just two people help Keith Ashworth-Lord run the CFP SDL Buffettology fund: analyst Andrew Vaughn and fund manager Rosemary Banyard, who joined the company from investment giant Schroders in 2016. ‘When you’re a small company, you have to be careful to only bring in people who are totally on board with the company philosophy,’ says Ashworth-Lord, who splits his time between a Manchester office shared with another firm and his home.
Having previously worked in London as an investment broker in a large firm, he feels a boutique firm suits him much better. He says: ‘I don’t have someone else overseeing my fund, and I’m not worrying about getting fired if I underperform for a quarter. It means we don’t have to track what our peers are doing, and we have the opportunity to go out on a limb.’
The approach seems to be working. The fund, which has just 31 holdings, has returned a hefty 146 per cent over the five years to mid-January, while the average UK all companies fund is up just 65 per cent over that period.
In the six years since the fund’s launch, Ashworth-Lord has only made two investments based on broker research, neither of which is still in the portfolio. ‘We don’t buy much research, particularly since new regulation came in this year (under Mifid II). We don’t want to pay for what we could do ourselves,’ he says. Instead, looking for the best businesses, buying at the right price and having patience are key to the fund’s success.
Lowcock says: ‘I think smaller teams are able to challenge and debate a view more easily. There are not too many opinions, so each voice gets heard. However, one downside to this is that a team can easily be dominated by one voice.’
The VT De Lisle America fund team is even smaller than Ashworth-Lord’s. Richard de Lisle runs the fund with wife Sarah from his home in Poole, where he enjoys not being constrained by normal office hours. He believes larger teams are actually at a disadvantage: ‘If you put a lot of people in a room with a lot of screens, they feel they have to do something. Sometimes you need to do nothing.’
Success in simplicity
The US market is a notoriously tricky market for fund managers to beat. But while the iShares Core S&P 500 ETF has returned 104 per cent over the past five years, De Lisle’s fund is up 155 per cent.
He avoids analyst research in favour of free, publicly available information. He prefers to look at company reports from several years ago to see if a business has delivered what it has promised. He starts with a top-down view of a sector and narrows it down gradually until he finds the businesses he wants to back. ‘I don’t want a company telling me what it’s going to do, and I don’t like businesses that focus on just one product,’ he says.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says: ‘We have consistently found that smaller, close-knit teams punch well above their weight in the performance stakes. While they may not have the same resources to draw on, high levels of accountability, simpler decision-making and a unity of approach can give them a competitive edge.’
Margaret Lawson and her husband Colin McLean set up SVM Asset Management, which runs five UK and European funds, a trust and a hedge fund, at their kitchen table in 1990. They now have a nine-strong investment team and work from a top-floor office overlooking Edinburgh Castle, but their investment process has not changed since that time. Lawson says a small team is important because it makes her feel more responsible for her investment decisions. ‘I run my fund, SVM UK Growth, like I run my own purse. I don’t want to lose money, and I tend to punish myself if I get something wrong. I will analyse a mistake because I don’t want to make it again,’ she says.
As a general investor, rather than someone who specialises in a particular area, Lawson finds that research from brokers can be useful, but she is never short of ideas. ‘There are so many sources of information: blogs, the internet, the radio. Ideas come from everywhere. I just listened to a programme about bitcoin. I’m not sure when I’ll ever be able to invest in it, but it’s a huge change, and I think it’s my responsibility to know about it,’ she says.
While Lawson never lacks ideas, she says one disadvantage of being a smaller fund is not always having the capital available to invest in all of them. The fund is fairly small, with £173 million of assets. ‘But that gives you discipline to find the best opportunities,’ she says, ‘I have to wonder if managers in big firms really wear their funds. Do they live and breathe their fund like we do? We invest in our fund, so we are aligned with our unit holders.’
Lawson looks for businesses that are disrupting their industries and carving out new opportunities for themselves. Top holdings in the fund include ‘category killers’ such as Ryanair and food business Kerry Group.
A small team doesn’t necessarily mean a smaller pot of assets. Ben Peters is portfolio manager of the £1.8 billion Evenlode Income fund, where the investment team has grown to five since its 2009 launch. He says that being a small team means they can maintain a disciplined approach to investing, seeking out businesses that are asset-light and whose customers’ decisions to use their products and services are not price-driven. Among the fund’s largest holdings are luxury brand Burberry and drinks company Diageo.
While many of these small teams are boutique firms, Khalaf points out that they can also be found within big organisations. He says: ‘For me, it’s how the team goes about the day-to-day running of the fund.’ While Janus Henderson has around £274 billion of assets under management, for example, Khalaf rates the Janus Henderson Cautious Managed fund as an excellent example of a small team set-up. ‘[Manager] Chris Burvill pretty much does his own thing,’ he says.
Similarly, while Rathbone Investment Management manages more than £39 billion in assets, Khalaf likes the Rathbone Global Opportunities fund, where ‘it’s really just James Thomson and Sammy Dowe with access to a couple of analysts’.
Lowcock likes Crux European Special Situations, run by a team of six investors led by veteran manager Richard Pease. ‘The group has a clear investment philosophy, looks at the long term and focuses on key areas such as quality management and sound finances,’ he says. Another favourite is boutique investment house Ardevora, where Jeremy Lang leads a small team finding opportunities by studying investors’ behavioural biases.
But larger teams also have their place in investor portfolios, according to Lowcock. He says: ‘Research can be pooled between teams and specialist analysts can help a range of fund managers. This can be particularly useful where a fund such as an absolute return fund covers a broad range of assets or where specialist knowledge is needed.’
Among the funds that may benefit from more resources are those that invest in emerging markets, where there are regional nuances that local expertise can explain. Similarly, specialist sector knowledge may reap rewards for value or growth funds.
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