• Backing a fund manager with a short track record can be daunting
• However, choosing a name in the ascendancy can generate strong returns
• We search for the managers making their mark
Spotting a fund manager on the path to ‘star’ status can have numerous advantages: the zeal that comes with an up-and-comer hungry to prove themselves, a longer investment horizon and less pressing concerns about finding a successor.
However, identifying who is on track to become a bona fide star manager has its challenges. Distinguishing between a genuine prospect and an individual on a lucky streak can be challenging, particularly when they do not have a long track record to back up their proposition.
“When’s too early?” Ben Yearsley, director at Shore Financial Planning and co-founder of Fairview Investing muses when considering the most opportune time to invest with a new fund manager. “The key to spotting an emerging star manager is have they been through different market conditions. How do they perform in difficult times?”
Investors will want to be sure that fund managers have been tested in sufficiently difficult market conditions, including those that do not necessarily lend themselves to a manager’s style of investing.
Compounding the difficulty of identifying rising stars is an industry push to move away from the premise of the star fund manager itself in the wake of the Woodford scandal. Funds are now less likely to push individuals in marketing efforts, instead emphasising the role of the broader team and processes.
“A lot of the investment industry has moved away from star managers to process-led investments. They now tend to throw more focus on the team. From a fund management group point of view, it makes sense. If the fund manager leaves you can say to investors ‘Yes, they’ve gone but the process is still the same,’” Laith Khalaf, AJ Bell’s head of investment analysis, explains.
However, despite these challenges, a select few fund managers are catching the eyes of fund buyers.
UK small-cap stars
Arguably due to a recovery after a tricky few years, the UK small-cap space has a number of identifiable rising stars. Simon Evan-Cook, manager of the multi-asset Downing Fox funds, points firstly to Joshua Northrop and Sean O’Flanagan, who run the Whitman UK Small Cap Growth fund (GB00BMTM5059), as ones to watch. The team looks for companies with the potential to significantly grow earnings and cash flows, and businesses that have exceptional management teams, strong competitive advantages and predictable cash flow generation.
“They are looking for smaller companies that are going to grow at a decent pace, they’ve already had a bit of takeover activity in their fund this year and after a couple of years of poor performance we’ve started to see that fund doing very well,” Evan-Cook says.
The fund invests in between 30 and 50 companies, with Bloomsbury Publishing (BMY) (4.7 per cent), JTC (JTC) (4.6 per cent), GlobalData (DATA) (4.2 per cent), Johnson Service Group (JSG) (3.9 per cent), and XPS Pensions (XPS) (3.5 per cent) as its current top five holdings.
Discussing the fund’s performance in the most recent quarterly update the team said: “The performance of the portfolio in Q2 was driven by positive and upbeat news flow across the portfolio, particularly amongst the fund’s larger holdings. Highlights included record results from Bloomsbury Publishing with a 53 per cent increase in earnings per share for the year ended 28 February 2024.”
Evan-Cook also recommends Adam Rackley, fund manager at Cape Wrath Focus (GB00BYQLQV79), who looks to buy oversold shares “in which investors have overreacted to events and valuations no longer reflect company fundamentals”, with Rackley adding that the best opportunities have tended to crop up “after a period of disappointment has created emotional reasons not to invest”.
Discussing the fund’s investment strategy and its successful play on IT software and services business NCC Group (NCC), the team recently said: “Our returns come from riding a re-rating, harvesting and then reinvesting the proceeds in the next idea. For us, the shorter the holding period, the better.”
As Evan Cook puts it: “I’m seeing that fund do very well. If you look pretty much since the vaccine announcements, which were in November 2020, that fund made exceptional returns based on old school, value style investing.”
Global funds
In the global equity arena, Evan-Cook suggests Sean Peche, who runs the Ranmore Global Equity fund (IE00B61ZVB30). “The first 10 years of running his fund he was in the wilderness, he was running a value fund when everyone hated value, and he made a couple of mistakes about the structure of the funds and some of the strategy,” he says.
“But over the last three to four years he’s concentrated on what he does well, which is picking stocks extremely well. If you look at his track record over the last three years or so, it’s fairly sensational,” he adds.
The fund has a 3.7 per cent position in Nippon Television (JP:9404), 3.2 per cent in Carrefour (FR:CA), 3 per cent in Petrobras (US:PBR), 2.9 per cent in eBay (US:EBAY) and 2.9 per cent in ABN Amro (NL:ABN).
Over at Liontrust Asset Management, Storm Uru and James Dowey, co-managers of Liontrust Global Dividend (GB00B9225P64) are highlighted by fund buyers as potential emerging stars. The duo has managed the fund for six years and focuses on companies that are innovative enough to outperform their rivals. That focus can be seen in the team’s review of the first quarter of this year, where managers pointed to a decision to exit the fund’s position in Alphabet (US:GOOG) because of concerns that Google faces substantial disruption risks over the next five years.
The fund has a 4.2 per cent holding in Broadcom (US:AVGO), 3.7 per cent in Taiwan Semiconductor Manufacturing (TW:2330), 3.4 per cent in Eli Lilly (US:LLY), 3.2 per cent in Dell Technologies (US:DELL), and 3.1 per cent in Eaton (US:ETN).
“You’ll find much more of the well-known names in there, the likes of Nvidia or Microsoft,” Evan-Cook says. “They’ve done a very good job of buying those stocks and then selling them when they become too expensive and then buying them back again when they’ve dropped a little bit. That fund shows a lot of promise,” he adds.
The team describes performance in Q1 as “broad based” but “buoyed by Nvidia, Lonza, and Eli Lilly, while Apple and Impax posed challenges.” For the year they anticipate “income growth of 10-15 per cent for the full year.”
Elsewhere, Paul Angell, head of investment research at AJ Bell, recommends Liam Nunn, who runs the deep-value Schroder Global Recovery fund (GB00BYRJXP30). “Liam is a passionate value investor, thoroughly committed to the Schroder value team’s disciplined accounting-based process where they scour the cheapest 20 per cent of global stocks, looking to avoid value traps,” he says.
“Liam has been named on the fund since February 2020. Since then, the fund’s assets have more than tripled to around £870mn, while the fund has also outperformed the MSCI World Value index,” Angell adds.
Following Kevin Murphy’s departure from Schroders, Nunn benefited from an internal reshuffle of fund management responsibilities and now co-manages the fund. The fund’s investment approach is to invest in “companies worldwide that exhibit classic recovery characteristics” and its top five sectors are consumer discretionary (24.44 per cent), communication services (15.66 per cent), financials (15.23 per cent), healthcare (14.32 per cent) and consumer staples (10.13 per cent).
