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THEGATEKEEPERSSTUDYUnlockingtheSecretsofFundResearch
Pre-RDR:Fundmanager
Post-RDR:Intermediary
ThechangingfaceofUK
distribution…
GATEKEEPERS
Source:Fundscape
THENEWGATEKEEPERS
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2010 2011 2012 2013 2014 YTD 2015FOFs Pref fund deals MPs & CIPs Total platform sales
Source:Fundscape
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ADVISERRISK
• Assessingsuitability
• Riskassessmentanddiscussion
• Designtheportfoliotomatch
• Assetallocationprocess
• Managerselection
• Monitoringandanalysis
• Reporting
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ADVISERRISK
• Assessingsuitability
• Riskassessmentanddiscussion
• Designtheportfoliotomatch
• Assetallocationprocess
• Managerselection
• Monitoringandanalysis
• Reporting
OUTSOURCINGISNOTEASY
WHOARETHEY?
RATINGSAGENCIES
D2CBUY-LISTS
ADVISERBUY-LISTS
OFF-PLATFORMLISTS
HOWDOYOURATETHERATERS?
• Whatcharacteristicsexplainfundselection?
• Dorecommendationsleadtobetterinvestoroutcomes?
METHODOLOGY
• Assumptions• TotalIAuniverseplusFCA-authorised funds• Twocohorts:listedandunlisted• Metrics• Alphaandbetavsector• Volatility• OCF• AUM,PTR,Fundlife,managertenure• SalesPerformanceBalanceratioTM
METHODOLOGY
Testingconventionalwisdom
• Dolistedfundsdemonstratesuperiorpastperformanceasacohort?
• Isthereanyevidencethatalphaisdeliveredex-postresearch?
• Doesindependent‘pure’researchgivebetterresultsthandistributors’research?
• DoD2Clistsexhibitbiasonprice?• Isanyratingworthhaving?
METHODOLOGY
• Comparingcohorts• Fundsize• Fundage• Managertenure• Whatdoesitinvestin?
THEFUNDS
• TotalIAuniverseof3,595funds• Ofwhich1,024arelisted• And2,571areunlisted
• Totallistedfundsare1,060• 1,024fromIAuniverse• 34fromFCA-authorised foreignfunds
APPEARANCES
64
of selections simply indicates a stronger consensus among gatekeepers regarding a positive perception of potential outperformance.
Among the smaller fund groups (lower total assets), Marlborough features most strongly with 55 appearances from 13 listed funds. This is driven in particular by their Special Situations, UK Micro-Cap Growth and Multi Cap Income funds that account for 34 of those appearances.
Fig 6.9: Prevalence of fund groups’ products on lists
The funds
The impact of gatekeeper selection is stark. Over the last five years, despite unlisted funds being by far the majority, their net sales have been negative at £80bn3 for the period. Listed funds on the other hand gathered net sales of £118bn3. The increase of adoption of listed funds in 2012-13 is likely to have been driven by RDR; more advisers are likely to have turned to external research to identify a smaller investable universe. Of course, the data is based on survivorship. It does not identify sales of funds that have disappeared in the meantime. However, our evidence suggests that listed funds are less likely to disappear or be merged away because they attract most assets.
Since 2013, sales have decreased within the listed fund cohort to the point where gross sales and redemptions virtually cancel one another out. The position is similar for the unlisted cohort. Figure 6.10 should not be taken to mean money is moving from listed to unlisted funds – the situation is more complex. A significant move
T H E F U N D U N I V E R S E
Source: Fundscape. Number of funds v number of appearances.
SchrodersFidelity
Invesco M&G
JupiterHenderson OMGI
Col ThreadBlackRock
First State
Standard Life Artemis
JPMorganBNY Mellon
AXA AberdeenKames
J OHInvestec
F&CMarlborough BG
Neptune Liontrust
GLGRathbone
Legg MnAviva
SJP0
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ASSETS
54 T H E F U N D U N I V E R S E
Comparing cohorts
The first analysis looked at the various attributes by which a fund might be characterised – size, age, relevant investment sector and so on. Comparisons between the cohort of 1,060 listed funds (the listed cohort) and the funds that had not featured in any of the researched lists (the unlisted vohort) were run.
This general analysis of fund universes is rarely performed. Much of what forms conventional wisdom regarding funds relates to price behaviour, ie performance or risk analysis. Competition for investors’ cash is fierce, and any data that supports the sales and marketing process gains precedence over research where a sales advantage is not immediately obvious. However, there are key characteristics that are common to the retail investment market as a whole that are worthy of recognition and ongoing monitoring.
Fund size
It could be argued that the more funds a group has available, the more funds might be listed. However, that relationship could imply either that prevalence has driven selection, or that selection was random, assuming that quality is evenly distributed across groups. The other alternative is assets under management (AUM); the more commercially viable funds a group has to offer, the higher its AUM.
Figure 6.1 shows that almost 60% of unlisted funds have AUM of £100m or less, versus 25% of listed funds. More than 70% of unlisted funds have assets of £200m
Fig 6.1: Distribution of AUM across listed and unlisted cohorts
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Listed/Rated Rest Of IA Uni
Poly. (Listed/Rated) Poly. (Rest Of IA Uni)
Source: Fundscape
FUNDLIFESPAN
55T H E F U N D U N I V E R S E
or less – versus less than 40% of listed funds. Given that £250m is considered a successful fund (see page 38), then there is an enormous number of unsuccessful fund launches. Normally market forces would weed out the weak products and demand would gravitate towards stronger brands, but this process does not seem to operate in retail fund management. If so many advisers are using external researchers, how does money find its way to these less than beneficial funds? The answer would seem to be that they are seeded at launch, have an initial marketing drive, and then are left to fend for themselves. Inertia eventually takes over and investors are not moved out.
Fund size is of course affected by the nature of the underlying investments and the associated liquidity. Smaller Companies funds tend to have lower AUM than their larger-cap cousins because they are less liquid and would normally occupy a sub-set of a portfolio rather than being a major constituent. However, across the range of sectors, funds with assets of between £200m and £800m are much more likely in the listed cohort (and again over £1bn) than would be the case in the unlisted group. Performance attracts assets, and performing funds generally tend to find their way onto lists. While it may not be a general rule, larger funds tend to be so because they are a) relevant rather than fashionable b) performing and most importantly c) sold well institutionally.
Fund age
Fig 6.2: Distribution of funds by launch year as % of each cohort
Of the funds that survive in August 2015, almost 16% of funds that are listed are more than 25 years old. That ratio is twice that of unlisted funds. At the other end of the scale, a listed fund is as likely to be a year old as it is to be 20 years old. Unlisted funds
Source: Fundscape. Launch year is August to August.
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MANAGERTENURE
56 T H E F U N D U N I V E R S E
on the other hand are as likely to be one year old as 25 years old and older. Almost 30% of the funds in existence came to market within the last five years with 8% of unlisted funds being less than a year old (see figure 6.2). Few funds that are only a year old make it onto lists; they tend to be 5-10 years old.
Half of unlisted funds are less than eight years old, while the listed cohort has less than 40% of its membership in that range. Funds that are included within a year of their launch amount to only 2% of the total and tend to be new funds launched by well-known managers moving to a new company, after six to nine months from leaving their previous team.
A new fund from a manager who has yet to receive ‘celebrity’ status needs more than 2 years of life. As we have seen, a listed fund is more likely to have over £300m of assets and a five to 10-year life. New funds are being launched all the time and there is something of a bottleneck of managers with two-year track records, vying for places on select and researched lists. However, the driver of performance and hence the longevity of a fund is the manager. Managers who fail are sacked and replaced or the fund is closed. We know about fund size and age, so now we should add the length of time a manager has been in control of the fund to our analysis in order to better define the features of a successful fund.
Manager tenure
There is a large group of funds around the £100 to £200m mark in terms of assets. We believe this tied in with the fact that so many new funds were constantly falling off the marketing conveyor belt. Fig. 6.3: Distribution of fund manager tenure – listed v unlisted
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Source: Fundscape
TheSPBRatioTM
• Analysesafund’sassetgrowthforperfectbalancebetweensalesandperformance
• Fundsclosetobalanceof50/50morelikelytobelisted
• Fundswithstrongperformancebiasmorelikelytobelisted
TOPFIVEBY10-YEARRETURNS
1. Bestinvest BestofBreed2. Citywire StarPicks3. HLWealth1504. MorningstarStarRating5. FundCalibre
MOSTCONSISTENTPERFORMERS
• Byreturnoverone,three,fiveand10years
• Bestinvest BestofBreedleadsinthreeoutoffourtimeperiods
• MorningstarStarRatingsbetweenthirdandfifthacrossfourtimeperiods
• Alsoconsistentlacklustre performance• Listswithtrackers• Somedistributor-ledlists…
TOPFIVEBYFUNDSCAPEFACTORS
1. HLWealth150Plus2. Bestinvest – BestofBreed3. ISALtd– GrowthPortfolio4. FundCalibre – EliteRated5. Bestinvest – Premier
TOPTHREEOVERALL
BasedoncombinedFundscapeFactors
• HLWealth150+andBestinvest BOBhardtoseparate
• Theirmoreextensivelists(HLWealth150andBestinvest Premier)alsoinfirstquintile
• ISALtdGrowthPortfolio• Onlyhassixfundsonlist,sohighconviction• Strongperformance,butsignificantlyhigherrisk
FUNDSCAPEFRONTIERFUNDS
• Distillationofthe36lists
• AppliedDataEnvelopmentAnalysis(DEA)toallthedata
• DEAscoreof1
• Morethan£200m
• Managertenuremorethan4years
• SPBratioofbetween-1and1
SELECTIONFACTORSTOGETYOUNOTICED
Fivekeyconclusions
• Blahblah
CONCLUSIONS
HOWWECANHELPADVISERS
• Provideanongoingreviewoffundselectorsandhowwelltheyhaveperformed/servedtheneedsofadvisers
• Helpyourbusinesstobetterstructureandarticulateitsfundselectionprocess
• Provideacost-effectivewayofmeetingandsatisfyingyourcomplianceandregulatoryrequirementsonanongoingbasis
HOWWEHELPFUNDGROUPS
• Provideanongoingreviewoffundselectorsinthemarketandhowwelltheyhaveperformed
• Outlinethecriticalsuccessfactorsforbeingselectedinthischallengingenvironment
• Provideyou withvaluablecompetitorinsight,allowingyou tomonitoryour peersandbenchmarkyour progress
• Equipyouwiththenecessarytoolstohelpchallengefundselectionsandentrenchedpositionsonlists
HOWWEHELPRESEARCHERS
• Providevaluablecompetitorinsight,allowingyou tomonitoryour peersandbenchmarkyour progress
• Provideanindependentassessmentofyourfundlistsandresearchprocess
INTHEFUTURE
• Moregatekeepers• Feedbackfromfundgroups• Feedbackfromintermediaries• Testingfacility?
HOWWECANHELP• GatekeepersReportplusfulldataset
• £6000
• Quarterlyanalysis(annualdatapackages)• Basic(£1,000)• Premium(£5,000)
• Bespokeanalysis
CODEWORD:MOUSTACHE
THANKYOU