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Incubator period

As Elvis Presley once sang, fools rush in . . . But as Credit Suisse launches its limited-issue Incubator fund of funds, how can an IFA avoid getting all shook up recommending funds like this one without a track record to show clients?

Incubator, run by Gary Potter and Rob Burdett, seeks to invest in unrecognised talent, the possible future stars of the fund management industry, and in old hands who have been given new money to run. It is capped at 75m and at a pre-launch event last week, Potter and Credit Suisse head of product development Toby Hogbin said they would be surprised if this limit had not been reached within a year.

Credit Suisse is asking IFAs to invest early in a fund with no proven record on the basis that the pair of old-hand managers at the tiller have enough of a track record.

Hargreaves Lansdown head of research Mark Dampier says going in early is how good fund managers have been delivering out-perfor-mance for decades.

He thinks IFAs should follow the lead of taking informed bets before three-year performance numbers are released.

Dampier says: “Isn’t it our job to recommend good funds? Too many people hide behind regulation these days when choosing a fund and will not go near anything without a three-year track record. But without being big-headed, I have been saying for years that it is best to get a stake in good funds early. It is nice to see Credit Suisse are now trying to encourage this and I think their fund will sell well.”

By way of example, Dampier cites the UBS smaller-companies fund run by Frank Manduca, which now has two years of performance numbers. It returned 100 per cent in the first year, and Dampier backed the fund early because he knew Manduca’s reputation from Gartmore. He also says Alistair Currie, former Edinburgh smaller-companies manager, has performed well at Premier, running a UK smaller-companies fund, and wonders how long investors will wait before buying into Leon Howard-Spink’s European focus fund since his move from Jupiter to Schroders.

At Schroders, Richard Buxton’s UK Alpha Plus fund has just run up its three-year numbers, returning over 50 per cent since inception. Schroders managing director Robin Stoakley says three-year numbers are seen as a reasonable medium-term period and, to many IFAs, they are proof of ability.

Stoakley says: “We all talk about past performance being no guide to future returns but at the end of the day a track record is evidence of a fund manager’s ability. Five years seems to be a big number in the pensions market but three years seems to be seen on equities as reasonable proof.”

Hull IFA Unity director Jon Willis does not think IFAs hide behind regulation in deciding whether or not to recommend a product. As long as potential risks are matched to a client’s risk profile and these are fully explained, Willis is comfortable recommending any product for the client.

Bestinvest business development manager Justin Modray says small IFAs without a big research budget may well be tempted to recommend the Incubator product to their more experienced investors because of the diverse research capabilities of the Credit Suisse team. But his own view on fund-of-funds products is lukewarm as he prefers to invest directly in funds. Indeed, Modray says he will be watching the fund’s contents with interest.

Modray says: “Credit Suisse are encouraging people to invest early to avoid missing out. We usually look for at least a two-and-a-half-year track record from managers before investing a client’s money. But we will be looking at the Incubator product because their offshore research capabilities may flag up some interesting funds for us to look at.”

JO Hambro marketing director Sven Kuhlbrodt says the track record of a fund is not as important as that of the fund manager in charge of it. His firm has an in-house headhunter responsible for researching the performance of fund managers, aiming to recruit them from other firms. Mark Costar, manager of its closed UK growth fund, came from Clerical Medical where Kuhlbrodt says his talents were “hidden”. His fund has returned 39.1 per cent since launch in 2001 to June 30, 2005.

Kuhlbrodt gives another example of Scott McGlashan who came from Close where his Japanese fund was top decile in the Japanese sector over one and three years to the end of December 2003. His Japanese fund was closed to new investment at Hambro’s after a year, capped at 200m. Hambro has just taken on Nick Roe-Ely from Tilney to launch its US growth fund.

Kuhlbrodt says: “The fact that Roe-Ely does not have a track record here is not an issue. As we have seen with McGlashan, a fund manager’s record from his previous firm contributes to strong selling of the fund. Roe-Ely’s perfor-mance at Tilney was strong and in IFA terms we expect the take-up of our US growth fund to be quite good.”

Buying a fund without a track record may be akin to falling in love at first sight. If an IFA finds the potential returns of a fund attractive and is convinced by the track record of the manager or managers involved, perhaps rushing in is not so foolish.

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