Quite a number of collective investment schemes (CIS) funds have been approved in the past two years - some sponsored by new fund managers, others an addition to existing fund families.
Side note: the industry is yet to witness underperforming funds (and there are some) being shut down or at least their bad record buried by merging them into successful ones.
Anyway, to shut down or not, these are business decisions. From a market standpoint. it makes sense to sell what the market will buy. And so the question follows; should one invest in rookie funds? Here’s a set of questions to ask.
What is the manager’s record? Just because the fund is a rookie doesn’t mean the manager is. See how successful the manager has been at other funds.
Request for the new fund’s prospectus to find out what other funds the manager has run and ask how the manager has done in the past.
What is the fund family’s record? If the manager is a rookie, then you should have confidence in the family. Consider whether the rookie’s parent company has several good funds. If the family is full of mediocre funds, or worse, what makes you think this one is going to be any different?
What does the fund do? Knowing the fund’s strategy gives you an idea of what the fund is likely to own. That tells you the level of returns and risk you can expect from the fund.
Say the fund will focus on equity markets. That indicates that you could score unguaranteed high long-term returns, but you’re guaranteed to endure a rough ride along the way.
What will it cost? The annual expense ratio (trustee fees, management fees, commissions, etc) is the one predictable thing about any fund, rookie or veteran.
You don’t know how much money your funds will make next year, but you do know what percentage of your investment they’re going to charge you.
Rookie funds tend not to be particularly cheap—low expenses result from the economies of scale that come with big, well-established funds.
A rookie may not be big enough to pass savings along to unit holders. So investigate the family’s other funds. Do they have modest expenses compared with their category peers?
Post investment, be on the lookout for signs of strategy change. Beware of funds that are constantly tweaking their strategies - hard to detect but start by asking for annual portfolio turnover metrics.
Tweaks usually happen because a fund is adjusting to what’s working in the markets at that time. The problem is you’ll always be a day late and a shilling short when you chase trends. To beat the market, you need a fund that can stand by its strategy even when that leaves it temporarily out of fashion.
Finally, as the rookie fund attracts new investors and grows larger, their returns may likely become sluggish, weighed down by too many assets.
It may lose its potency, and hence its returns revert to average. Shrinking assets, on the other hand, can be a different kind of warning sign. Possibly, a lack of skill, lack of in-house support or both.
The writer is the Managing Director, Canaan Capital Limited.
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