No smirking please. This is a serious matter. The issue of Fund size is constantly rearing its ugly head and once again we in the Funds industry are battling against what seems an inevitability when it comes to Fund consolidation within the active Funds industry.
For many years now many of us, including Jon (JB) Beckett, have been talking about the growth of the Supertanker Funds and the potential issues that come from investing in them. However, my issue is not the Supertanker Funds parse, although I do have my reservations, but more about new Funds and how the rise of the Super Groups is causing the innovation and entrepreneurial elements of our industry to be stymied. We all know how difficult it is to launch a Fund. Proof of track record, articulation of process, marketing costs and transactional platform resistance to new funds are just some of the issues that face a new manager with a new idea. To be fair how some launch is a miracle and without a good head-wind then its tough going. Without a parent with big pockets it can be very difficult for new managers to become the stars of tomorrow.
We all know Funds that have closed because of not gathering enough assets or the size of the Fund has shrunk due to performance or the asset class being out of favour. But what about Funds closing due to the investor making an error of judgement. I remember meeting a manager who had launched a Fund but within 18 months they had to close it. Why, you may ask?
Simples. The initial investors just didn’t do their homework properly. Despite extensive due diligence and crushing the manager on price, the largest investor pulled the money when they got cold feet following a period of volatility. The Fund was performing exactly as described and was delivering the returns that was expected. However, the monies went out and soon enough when other investors realised their % was more than they were comfortable with, so the rest pulled their money. The underlying portfolio was producing double digit returns but despite this the rationale for investing in the Fund disappeared. The Fund was over £100m in size but shrank to under £10m in as many weeks. It was doomed.
So, what are the lessons from this?
Firstly, the diversification of investors. All your eggs in one basket with a seed investor is a risky business and unless you can build a good spread of investors pretty quickly you run the risk of losing the seed investor and anyone else thereafter. Ensure that the strategy appeals to not just one investor but to a broad spread. In short “book-build” before you launch. The more investors the better and the more diverse the better.
Secondly ensure the investor knows fully what they are buying. Due diligence will ensure they have done the “paperwork” but sit down with them and really explain the risks, the volatility and ultimately manage their expectations. If you have a portfolio that is volatile, make sure they understand that, and they don’t run for the hills at the first sign of a wobble.
Finally, constant communication is key. Be open and transparent with the portfolio as often as you can, share regular updates…NOT FACTSHEETS!! but good quality information that helps investors feel part of the Fund and the investment road trip they are taking with you. Hopefully they won’t tuck and roll without you knowing!!
Have a great week.