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When you wish upon a star

I have always been a cynic when funds are launched, particularly ones which have a quirky name that makes good promotional copy.

Take Credit Suisse’s new Incubator fund, for instance. Gary Potter and Robert Burdett claim to have identified several areas producing superior returns which they have incorporated in their latest multi-manager offering.

The Incubator fund has certainly raised a few wry smiles from rivals, who have asked what is new about the fund. An email I received from a well-quoted IFA asked: “Isn’t this really about desperate fund of fund managers trying to distinguish their offerings in a crowded marketplace?”

Undoubtedly, there is pressure on fund groups to come up with a product that will stand out from the rest. The new fund aims to do just that.

The first area identified by the CSAM duo is that of unrecognised talent, where managers working for boutique investment houses or big organisations are unknown or have been overlooked in a crowded sector.

The second area is what they dub “old hands, new start”. These are managers who are likely to have many years of investment experience and a proven track record. But recently they may have moved from one company to another or taken a career break and are now returning to manage money or launching a new fund. This fresh challenge is potentially a powerful driver of returns.

CSAM says smaller funds often deliver better performance than their bigger counterparts. It points to figures from Lipper which show that 30 per cent more sub-100m funds are consistently in the top 25 per cent in each of the past three years than funds that are bigger than 100m.

Of course, fund of funds managers have been investing in small funds from little known investment boutiques for years. This is what has caused rivals to question the uniqueness of the new fund.

When I was a reporter on this paper seven years ago, Potter and Burdett, then of Rothschilds, frequently gave the spiel on how they could add value for investors in this way. Until then, I had never heard of names such as Thames River Capital, Odey or Morant Wright.

There is also the well-trodden argument that size is no barrier to decent performance and we can all give examples with this in mind, such as Fidelity special situations, Invesco Perpetual income and Jupiter income.

But I am not sure this is a reason to dismiss the Incubator fund out of hand. It is not saying big funds are duds or it is the first to invest in small start-ups.

The concept of having a fund with the specific objective of investing in small funds is legitimate and there is something exciting about unearthing the next gem.

Just look at what happened earlier this year when it emerged that John Duffield had put 1m of his own money in New Star Hidden Values, managed by Jamie Allsopp. Rumours followed that Allsopp was being touted as the next William Littlewood and the fund swelled from 4.5m to 28m in seven months. Just think of the rewards if Duffield’s faith in Allsopp comes off.

There haves been several shining examples of funds that have gone undiscovered in their vital early years. Matrix Quantock and Jup- iter Undervalued went unnoticed by the masses, despite turning in top-decile performance in their first year. Rensburg Micro Cap was just about overlooked by all and sundry when it launched in October 2001. One year on, it had doubled in value and was ranked number one in the smaller companies sector.

I am sure IFAs will lap up the Incubator fund and the fact that it is limited to 75m will surely fuel more interest. The only question I have is whether, as Burdett and Potter believe, there are around 30 star managers of tomorrow waiting to be unearthed.

Paul Farrow is deputy personal finance editor at the Sunday Telegraph


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