Earlier this year I wrote about the Grindrod Stable Fund which we believed was a good option for conservative investors seeking income from their portfolio. We followed that up with an article on the Prudential Inflation Plus, which we believe is a good choice for investors seeking capital stability and growth rather than income from a conservative fund.
After the latter article I received an email from a reader wanting to know which of the newer funds in the multiasset, low-equity category would be a good fund to invest in. He has this theory that new funds tend to do better than established funds because, according to him, the fund managers need to get the performance up there to be able to attract inf lows. It is a theory I have heard before, but it is certainly not one I subscribe to in the absence of any hard data.
There is a size theory which suggests that smaller funds tend to outperform because they are able to get a meaning-
-2% -4% Jan 2014 ful exposure to small-cap shares, something which larger funds are unable to do. I imagine that the reader had sight of a recent paper entitled Scale and skill in active management which was released earlier this year by Wharton f inance professors Robert Stambaugh and Luke Taylor, and Chicago University’s Dr Lubos Pastor, which found that where managers had similar skill levels, managers of smaller funds outperformed managers of large funds. “If scale impacts performance, skill and scale interact: for example, a more skilled large fund can underperform a less skilled small fund,” says Stambaugh. I have yet to see research on the South African experience, but given the relative size of the markets I imagine that it would be quite a different experience.
If I did have a proverbial gun against my head to pick a new, up-and-coming f und in the multi-asset, low-equity category, then my choice would be the Foord Conservative Fund (FCF). The fund was launched in January 2014 and has a benchmark of CPI + 4% per annum. There are a number of reasons I would go for the FCF, the main one being that the manager has a credible track record in managing asset allocation mandates. The fund also fits quite neatly into the manager’s philosophy of capital preservation first. The manager has been managing another fund in the same category since 2007, the Nedgroup Stable Fund, which also has a CPI + 4% performance target. The FCF is different to that fund in that it can go up to 60% equity exposure while the Nedgroup fund has a maximum of 40%.
Another attractive feature of the FCF is its cost structure, which sees the manager charging 0% annual fees in the event that there is a loss over a rolling 12-month period. This aligns the manager’s interest with the client’s need for capital protection. The performance fee also f lexes quite quickly in that returns are measured over rolling 12-month periods, so investors are not saddled with high performance fees for lumpy outperformance periods.
The Foord Balanced, Flexible and International Trust already feature on our internal shopping list for clients, so the Conservative Fund will be a welcomed addition to the list in the coming months. However, it is the manager’s asset allocation track record, capital preservation philosophy and its fee structure that will see the fund being included on that list, not the fact that it is an up-and-coming fund.