When it comes to investment fund management, being small can lead to something beautiful.
Here it at Minerva Money Management we are proud of our small YFS Intelligent Wealth Fund. We believe being small is our superpower. It’s the way we will beat the market including the large fund managers.
An elephant can’t gallop but a flea can jump over 100 times its own height.
The problem with large investment funds
There is around £351billion invested with the ten biggest fund managers in the UK by value of retail funds under management.
This is logical of course. It can make sense to want to stick with the crowd. There is a deep human tendency to want to protect yourself in the herd. The problem is that the bigger a fund gets, the harder it will be for it to outperform the market.
In fact, over the last ten years around 92% of all large funds in the US and Europe have failed to beat the market.
So why is it so hard for large funds to beat the market?
The problem is, the larger you get the smaller the pool of investments you have to fish in.
Say for example you’re an investment manager of a £10billion fund. There’s a brilliant investment opportunity with a growing company valued at £300million. You want to buy around 5% of the shares in the company which would cost your fund £15 million. This £15million investment would only represent 0.15% of your fund. It’s too small an investment for your fund because your fund is too big. You could buy the whole company for only 3% of your fund but no fund manager wants to own a whole company and be in charge of day to day operations.
So, you miss out on a high growth opportunity because you are too big.
Unfortunately, this leads to large active funds becoming closet trackers. They can only invest in the largest companies listed on the main markets, so their performance tends to then mirror a passive fund, but you pay a lot more for the privilege. If you want a passive fund, invest in a dedicated passive fund with lower charges not a large fund that claims to be active and charges active fees.
There’s another reason large active funds end up being closet trackers. The fund management companies are mainly publicly listed companies in their own right and so have shareholders to please. As long as they have money under management, they will earn their fees. Performance doesn’t matter so much, as long as they can keep performance close to the main market their funds under management and their earnings from them should stay safe and keep shareholders happy.
Shareholders in the underlying fund managers don’t care about the performance of the actual funds. They are just interested in seeing the fund managers make a profit.
Small is one of the only ways to beat the market
We already know large fund managers do a really poor job at beating the market but according to the evidence there are still ways to beat the market over the long term.
One of those ways is to invest in smaller companies.
Over the long term the data shows that small companies have outperformed large companies.
If you think about it this makes sense. A smaller company can grow more quickly because it is starting from a smaller base.
A large oil tanker would require around five to eight kilometres and roughly 20 minutes to come to a complete stop and then a turning diameter of two kilometres. A small speed boat can turn around in seconds.
Even investing legend Warren Buffett has used investments in small companies to help him outperform the market over the long term. Although it’s more well known that Buffett uses a value approach to investing as a factor that helps him beat the market, investing in small companies is actually a close second when analysing his performance.
Investing in smaller companies is more volatile so you need to make sure you are comfortable with the risk, but you don’t get better returns without taking more risk.
So as a small fund manager we believe we have an advantage. We focus on small companies and value companies because we can. A genuine difference from the main market.
We don’t have to answer to shareholders and a small investment into these types of companies is a big investment for our fund that could really impact returns over the long term rather than being a speck of dust for the large behemoths.
We are aiming to jump 150 times our size and more. Why not join us for the ride.
Carl Roberts, Director
If you want to learn more about this topic, please find the link here.
More information about our fund the YFS Intelligent Wealth Fund can be found here: Hargreaves Lansdown or AJ Bell
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
