153 new funds launched in the past year, are any on your radar?

Some of life’s best experiences come from “taking the path less travelled”. It’s a wisdom we might apply to life but conflicts with everything we know about investing in funds. Investors are generally advised to look for long and consistent track records, well-established teams, research ratings, and large fund sizes. This advice typically rules out newer entrants to the market.

But could this mean we are missing out?

The research suggests we could be missing out on performance in some cases – and we also shouldn’t assume that new market entrants are green. After all, some new funds are operated by investment teams with a wealth of experience. 

Ahead of Livewire’s second Undiscovered Funds Series, I’ll examine some of the research on investing in this space and how to evaluate newer funds when you don’t have a long track record to go by.

Managed funds by the numbers

• 153 - the total of new funds launched between March 2023-March 2024. (Source: Morningstar)
• 43% of the new launches were in the equities space (Source: Morningstar)
• $4.75 trillion – total assets under management for the managed funds industry (as of December 2023) (Source: ABS)
• 647 fund managers operate in Australia (Source: Financial Services Council)
• The top 10 largest asset managers are tipped to control 50% of mutual fund assets globally by 2027 (Source: PwC 2023 Global Asset and Wealth Management Survey)

A deeper look at the new funds

The bulk of the new equity funds were in the small and mid-cap (SMIDS) space and favouring Australian equities, which is an interesting reflection on where fund managers are tipping returns to come from. It shouldn't come as a surprise to Livewire readers either, given the dominance of small-caps articles that have featured in the last few months. 

Mid-caps are also looking promising and Zenith's David Wright actually pointed to this as being a funds management gap when we ran the Undiscovered Series last year. 

Investors will notice a few familiar names in the small and mid launches too, such as Auscap, Paradice, Eley Griffiths Group and Munro, all long experienced in small and mid-cap investing. Yarra Capital Management also featured in this space with the Tyndall Australian Small Companies Fund, using a more niche application of their existing approach to equity investing.

Given better yields in fixed income, readers might have expected to see more funds in this space but new issues in fixed income were 13% of the funds. 

Alternatives saw higher issuances, representing 17.6% of the new funds launched. Investors are being educated more about the value of including alternatives in a portfolio, which suggests that fund managers are working to support growing demand in this space. A familiar name in this space is Blackstone, the world's largest private equity firm, which has been building its Australian offerings.

If you are interested, you can download the spreadsheet Morningstar compiled for us at the bottom of this wire. It includes:

•  name of the fund 
• the fund manager
• performance data.

Should you fear a short track record?

We tend to think 'performance' when we think track record – and fear a short one.

There is varying research regarding short performance track records. You can read more about this in-depth in this wire from last year.

A quick summary follows:

• Hedge funds performance tended to peak early and only modestly higher risk was involved. (Huang, Jie and Ma 2022, Preqin and 50 South Capital Report 2019)
• Research from the Australian Funds Monitor across 400 actively managed equity funds and absolute return funds in 2018 found funds typically performed better in their early years of operation. However, when the research was repeated for 2019-2022, CEO Chris Gosselin found that market context influenced results and there was far greater variation in performance on the whole.

So, while performance is a mixed bag, that doesn’t mean you should entirely discount it.

While good performance in one year doesn’t mean the same will happen the following year, an ASIC analysis found there was a strong correlation between poor performance in the past and in the future. It is also a strong indicator of future fund closures. 

If it looks like a dog, it probably is.

Why track record is more than performance

When you think of track record, the World Economic Forum suggests thinking broader. Look at manager-specific qualities like the talent of the team, investment philosophy, and platform.

This matches with research house Zenith Investment Partners' approach to assessing funds with a less than three-year record, along with 

“The criteria we’re really looking for is that they are experienced investment professionals, they have run money in that fashion before, they are backed by a stronger corporate,” says David Wright, CEO of Zenith Investment Partners.

Think of it this way: if the team running a newly launched fund has run similar strategies in the past with consistency and success, then that probably bodes well for a new fund with the same approach and same team. If you simply avoided the fund based on a short history, you’d be missing out on a tested approach that could be suitable for your portfolio.

Take for example, the newly launched Vinva International Equity Alpha Extension Fund. It is actually run by Hall-of-famer Morry Waked using a long-tested quantitative model. Or, fund manager Blackwattle might be newly established, but the underlying team each average over 20 years industry experience. 

On the other hand, if a group of university students approaches you with zero experience in managing money, and no corporate backer to invest in their fund, you might get very lucky to have invested in untested geniuses… or you might just blow your money. There’s a difference between new and green.

What to assess instead when it comes to undiscovered funds?

The rules of investing still apply when it comes to newly launched funds. You can grab some good rules of thumb from Pinnacle Investment Management's Managing Director Ian Macoun in this wire, but otherwise in short:

1. Look at the product disclosure and check it is registered with ASIC. 
2. Consider the objective and whether the Fund’s outlined strategy and philosophy can potentially achieve it. 
3. Monitor monthly statements to see that the Fund continues to invest as per its stated purpose and doesn’t steer off track. 
4. And as above, experience matters! Make sure there is a solid team managing your money – you can always look at the history of their previously managed funds to get a feeling for their consistency and strategy.

Where do you look?

New funds are often undiscovered for a reason. A limited market budget and time to promote are just two reasons. But in Livewire’s Undiscovered Series, we’ll take you through a few of the newer entrants to the Australian managed funds market and help you get started with your research.

We hope you enjoy the series. Let us know in the comments below some of your big questions about investing in undiscovered funds – and whether you have any top picks.