Bigger Fund Managers Are Not Necessarily Better

 When it comes to choosing the best performing mutual funds and unit trusts, bigger brand may not always be better. Choosing the wrong fund by investing with big brand fund managers can cost investors dearly.

Many investors are fooled into thinking that buying from a big-brand fund manager will somehow protect them from choosing a poorly performing fund. While big brand fund managers offer many great funds, they also market many failing funds. Just because a fund is a top performer does not mean that this is true across the entire range of that fund manager. Investors need to look beyond the brand and look more closely at the fund’s fundamentals.

Recent years have seen an increase in the popularity of boutique investment houses in the UK market, which is hardly surprising given their consistent track record of positive performance. There are many ways to classify a boutique, but generally speaking, boutique fund managers are independently owned or employee owned and relatively small in size. They typically invest in their area of specialization rather than trying to be everything to everyone and operate funds in every sector.

Recently, boutiques have even stepped on the toes of large firms when it comes to serving retail customers. Last year, boutiques overtook their larger UK counterparts to take the top four spots in the ‘best general fund manager rankings’. Big brands such as UBS and Standard Life slipped down the rankings, while Rathbone, Neptune, Dalton and Artemis boutiques took the top spots.

The last quarter of 2006 was a chilling one for investors, with millions wiped off share prices and markets. But boutique fund management companies continued to outperform their larger competitors.

The disappointing reality for many private investors is that neither they, nor in some cases their financial advisors, have heard of some of these relatively unknown smaller investment organizations and are therefore missing out on great investment opportunities.

The same caution that is applied to big brands should be applied to big names – or so-called ‘star fund managers’. Is it wise to put your money on the reputation of a big-name fund manager?

Research shows that only 15% of managers manage the same fund for more than six years, 43% for four to six years and 39% for two to four years. Similarly, 80% of fund managers at the UK’s top 50 fund providers have left their funds in the last three years. Around 60% of managers are relocating due to offers from competitors.

From an investment perspective, familiarity does not always create substance. Investors should monitor their investments very closely and make sure they have the tools to identify strong investment opportunities that would otherwise slip through their fingers.