Research house Zenith Investment Partners has defended its practice of issuing ratings on managed funds early in their lifecycle, arguing it can expose investors to outperformance that can be difficult to sustain at scale.
In a note issued yesterday, Zenith head of equities Quan Nguyen said the potential for strong performance can change quickly as managed funds grow.
When it comes to the equities space in particular, Mr Nguyen said, the best opportunities are ultimately finite – and getting into a fund early when trading is "most agile" can often mean a big difference in returns for investors.
"In theory at least, the larger a fund grows, the harder it is to sustain the performance of its early days. Wait several years and you have a real prospect of missing the investment boat," he said.
"In rating funds early, we need to balance out the priorities and probabilities of approving investment solutions that will add the most value to our advice clients, while allowing an appropriate track record to develop to ensure all ratings are based on solid fundamental principles and high conviction," Mr Nguyen said.
According to Zenith, the average small cap fund outperformed its benchmark by approximately 12 per cent in the first 12 months of its life.
However, that falls to 7.9 per cent by year 10, and then 7 per cent per annum thereafter – so there is "still value" in staying with more mature funds.
Zenith said it looks to help advisers access the "world's best investment opportunities" as soon as practicable.
"That requires having a broad, lateral and empathetic mindset on what advisers and their clients require as investment solutions, often before they may be aware of its availability," said the researchers.
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