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Time for change


Time to break an investment commandment


Time to break an investment commandment is a guest post by award winning freelance journalist Adam Lewis and will be of interest to private client investors. A similar version of this article also appeared on Your


Time to break one of the investment commandments?


While it’s not officially written down as one of the 10 commandments, imparted wisdom that seems to have been handed down from adviser to adviser, is the three year rule. That is they will only invest in a fund once it has obtained a three year track record. That way they can judge how good the manager is and try and limit the chances of suffering painful performance early on.


However the problem with this prerequisite for considering a fund is that it immediately rules out new launches and we all know the fund management industry loves a good fund launch.  Hardly a week seems to pass by without something new to come out to tempt investors and with the industry seemingly going through another merry-go round of fund manager swapping, following the three-year rule is not as simple as it would seem.


This is because often the so-called ‘new’ fund is a straight copy of what the incoming manager was running before at their previous group. Take Jupiter’s recent launch of an Asian Income fund as an example. The fund is managed by Jason Pidcock, who joined Jupiter at the start of this year having previously ran a similar fund at Newton, which he managed since its launch in 2005. Indeed the Newton Asian Income fund was one of the first funds on offer to UK retail investors hunting for dividend paying companies in the Asia region.


As such when Piddock’s departure to Jupiter was announced it lead to a spate of headlines, with investors in his Newton fund left wondering should they stay or should they move their money over to his new fund? It’s the age old question when a manager leaves, another one however is how long should investors wait before investing in a fund that has only just launched.


With this is mind I thought I would speak to some fund selectors to get their in sights on the so-called wisdom of the three-year rule.


Hargreaves Lansdown’s head of research Mark Dampier is one such fund picker who questions its logic. “We do not follow funds, we follow managers,” Dampier says. “There were some advisers preaching about waiting a certain time period to invest in Neil Woodford’s new Woodford Equity Income fund when it launched in June 2014. However if you had waited six months before putting in you would have lost a lot of the performance he has already achieved.”


The point Dampier is stressing, is that just because a fund may look new and shiny, and not necessarily have a performance track record to back it, the person who is running it does. For example investors can look to the performance Piddock achieved in the 10 years running his previous fund, to get an indication of what his new fund, which follows the same investment process, will be about (although past performance is no guarantee for future performance etc etc).


“Unless that fund manager was part of a big team and may not have been solely responsible for his previous fund’s track record, you can get a pretty good idea about his new fund and not have to wait three years before investing,” he says.


For new funds run by new managers the rule is different. Here Dampier does advise investors wait before piling in. However in cases like this he argues that three years is not nearly enough time to sit on the sidelines.


“Five-to-seven years would be my minimum,” he says. “You need to see how the manager performs over different cycles and three years is not enough time to see this.”


John Husselbee, head of multi asset at Liontrust at Asset Management, says while there is an argument for allowing managers to build up a track record, the magic three year rule should be qualified based on who is buying a fund.


He says: “As a professional multi-manager, it is my job to understand managers and their styles and that knowledge should allow me to make a judgement call on new funds. The opportunity cost of missing three years of performance is potentially considerable, particularly given the calibre of managers launching funds in recent years.”


However for the DIY investors who don’t have day-to-day access to the managers, nor know how they specifically run money, Husselbee says waiting three years is a “sufficient” period of time to assess if they can repeat their successes from any other their previous funds.


“If it is a brand new strategy and a new manager three years is not nearly enough,” he adds. “You have to be able to judge over a full market cycle and this can take anywhere between five and 10 years.”

Peter Lowman, CIO of Investment Quorum is also well known as a buyer of new and boutique funds and echoed much of what others in this article stated but added “As a boutique wealth manager it may be that we have an inclination to boutique fund managers and our modest size allows us to buy early in the life of a fund when other, larger, organisations would not be able to do so due to capacity constraints. This often gives us a tactical investment advantage.”



London Wealth Management, Private Clients, Investment Quorum, Guest blogger, News, Adam Lewis image


Adam Lewis is a freelance journalist and content director at Matrix Solutions

He has worked as a financial journalist for over 14 years, the last 10 of which were at Centaur where he lately edited Fund Strategy magazine for 3 years until February 2015.  He has won five awards for journalism excellence, including AIC Trade Journalist of the Year (2002 and 2008) and IMA Specialist Reporter of the Year (2005).


Time to break an investment commandment is a guest post and the views here do not necessarily concur with those of Investment Quorum.  In fact, it is very often the case that we may be largely in disagreement but we respect the opinions of others and value their contribution to the wealth management debate.  Guest posts may appeal more to some than others and may often have an industry, stock market or sector knowledge expectation.

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