Hunting for alpha: Four premium priced funds worth paying for
In addition to platform pressure, the ongoing challenge from passives shows no signs of letting up.
Momentum is now shifting from mid-cap stocks to large caps, providing a fresh headache for active managers, given the prevalence of large caps in trackers.
Unsurprisingly, many fund groups have cut prices in response to calls from distributors, with the average AMC of 0.75% for most equity funds coming down to 0.65% or lower via new deals.
However, the flurry of fees cuts masks the fact many wealth managers are prepared to cough up more than the average 75 basis points for some funds. Stanhope Capital is one group which has been cutting exposure to passives and larger funds in favour of smaller and more nimble active managers, despite the higher costs.
A niche strategy, experience, and a good track record are all things wealth managers are willing to pay up for. Here they reveal the funds they are backing, despite higher fees.
Skagen Kon-Tiki fund
Manager: Kristoffer Stensrud
Fees: 1.5% plus performance fee based on difference between fund’s returns and MSCI EM
Norwegian fund house Skagen’s £5.8bn emerging markets fund has fallen 0.4% over the three years to 2 July, compared to a sector average fall of 8%, according to FE.
Its flexibility – it can and does go anywhere within emerging markets – is a key factor for buyers.
“Performance has been good and the managers are completely unconstrained,” Equilibrium Asset Management’s investment analyst Eric Parker.
“They can move across the board in terms of the way they pick stocks, so it is genuinely something different.”
Schroder GAIA Paulson Merger Arbitrage fund
Manager: John Paulson
Fees: 1.25% management fee, 20% performance fee (discount for investments over £500,000)
Schroders’ externally-managed fund was only announced in April, but managers are already preparing to buy in.
The portfolio is a mirror of legendary US hedge fund manager John Paulson (pictured)’s merger arbitrage portfolio, the Paulson International fund.
Investing mainly in US, Western European, and Canadian large-cap public equities either already involved in mergers and other corporate events, or likely to be, Paulson’s existing fund has delivered 12% per annum since launch almost 20 years ago.
“This [new fund] is a completely different type of investment,” said Prospect Wealth investment manager Matthew Hunt.
“You just have to judge whether you want to pay the money.
“It is a competitive marketplace, and the firm will charge the fees it can get away with.”
Aberdeen Global Asian Smaller Companies fund
Manager: Asian equities team
Fees: 1.15% AMC
Falling under the remit of Hugh Young and Aberdeen’s extensive Asian equities team, the Global Asian Smaller Companies fund has rewarded investors with a return of 27.9% in the three years to 3 July 2014, compared to a sector average gain of 9.9%, according to FE.
Using an unconstrained approach and owning stakes in over 100 companies, the fund is a research-intensive, bottom-up portfolio.
Charles Stanley Direct’s head of investment research Ben Yearsley said: “We have to pay more for expertise, and Asian smaller companies is a pretty specialist area.
“Investing in smaller companies is very intensive, so you need a lot of people on the ground, and naturally you are paying for that quality, as Aberdeen is one of the premier Asia managers.”
Odey Swan fund
Manager: Crispin Odey
Fees: 1% AMC + 20% performance fee
Crispin Odey’s one-year-old fund has had a baptism of fire since launch, dropping 11.9% year to date, as a series of bets within the consumer goods and services sectors are yet to pay off.
However, the hedge fund manager has retained a loyal following, and investors including Turcan Connell chief investment officer Haig Bathgate expect performance to pick up.
Bathgate said: “If you look back in history, Odey tends to be early, but he is very rarely wrong.
“The market overall is not going to move very much now, but there will be a big divergence in companies’ fortunes. At this point in time, we do think active managers can add value.”