35 undiscovered funds Livewire readers have on their radars

Despite the wild market volatility we have witnessed since the early days of the COVID pandemic, ASIC records show that more than 700 new investment products hit the market in the past three years. 

While this represents a big pool of potential opportunities for investors willing to roll up their sleeves and do some research, it's understandable that many may be cautious of investment products without a track record. 

However, data from Australian Fund Monitors has found that the early years of a fund are often when it yields its strongest returns. So how do you identify the thoroughbred funds and their jockeys from those not even in the race? 

Given the lack of coverage these new investment vehicles typically receive, Livewire recently launched its inaugural Undiscovered Funds Series. As part of the Series, 500 Livewire readers participated in a survey sharing their perspectives on investing in (or avoiding) funds with less than three years of performance history.

In this wire, I’ll summarise the key findings from the survey, provide a few resources to help investors track new entrants to the market, and share a list of the Undiscovered Funds Livewire readers are following or using today. 

Investors are patiently waiting for opportunities

As with all Livewire surveys, we like to see how investors are feeling about market conditions. Despite the barrage of bleak news (think debt ceilings, rampant inflation, mortgage cliffs and recession forecasts) investors appear to be calm but not complacent. 

48% of survey respondents said they were neither bullish nor bearish - simply waiting patiently for more evidence - perhaps not surprising, given the ASX recently notched up its 5th worst day in terms of trading volumes for the year to date.

Meanwhile, 25% said they are optimistic and looking to increase their allocation to risk assets versus the 18.5% who said they were cautious and were actively reducing their risk.

Notably, only 6.2% said they were worried and holding high levels of cash.

Keeping an open mind about investing in new funds

54% of survey respondents said they invest in funds with a performance record under three years and a further 22% said they were undecided. 24% gave a flat ‘no’ and said they wouldn’t consider investing in funds with less than three years' performance track record.

Meanwhile, some readers shared that they simply prefer to invest in shares and ETFs - Managed Funds are not part of their investment mix.

We reviewed all the responses and have identified some common themes when it comes to assessing a fund with a track record of less than three years. These included: 

1. Research the history of the management team
2. Meet with the portfolio manager (Check for honesty, and that they align with your interest)
3. Diversify (treat an undiscovered fund as a risk asset)
4. Make sure the manager has skin in the game
5. Research key holdings and strategy
6. Ensure the size is large enough for there to be liquidity for an exit

There were also some cautionary tales from investors ranging from “Avoid” through to “Be prepared to lose the lot.”

These comments prompted me to reach out to our readers to see if there were any lessons we could draw on from bad experiences. 

Livewire reader experience: Andy

I was fortunate enough to spend an hour on the phone with Andy, a Livewire reader living in rural Australia who has dedicated a significant amount of time to researching fund managers for his SMSF.

Andy hasn’t had a bad experience per se, but he has a healthy level of cynicism based on the data that shows the majority of active managers don’t beat their benchmark. To combat this, Andy has developed a 20-point checklist for assessing a new fund and he was kind enough to share a selection of his criteria with me. If the fund scores three red flags against his criteria, they are struck off his list. 

• Funds Under Management (FUM) is manageable relative to the benchmark
• Raising additional capital or launching lots of new products can be a sign the manager is getting greedy (red flag)
• Prefers managers that have a single fund
• Prefers long-only funds (avoids shorting)
• Looks for consistent returns rather than a sporadic big win
• Communication with investors needs to be excellent
• Humility - looks for quiet achievers

If you have anything to add, I’d love to hear about it in the comments section below and thanks again to Andy for your time.

How the professionals assess Undiscovered Funds

Throughout the Undiscovered Funds Series, we’ve spoken with two industry experts to get an understanding of the criteria they use to assess funds. You can access the interviews with Pinnacle’s Ian Macoun and Zenith’s David Wright below. 

Both of these experts have decades of experience researching and assessing fund managers and shared the criteria they value the most. These included: 

1. Alignment: The fund manager should have a stake in the business and be a significant investor in the fund.
2. Experience: The fund manager needs to have proven they have talent from their professional experience (E.G. they have been working at another investment house).
3. Passion and humility: The manager should be passionate about investing but not arrogant.

Funds

Only 5% of the funds Ian Macoun reviews pass his screen. Here are 6 traits they all possess

View

Investment Theme

The key characteristics Zenith looks for when rating funds

View

Professional and Sophisticated Investors are on the hunt for Undiscovered Funds

We dug a little deeper into the data from the survey and found that investors who identify as an Advisor, Sophisticated Investor, or Family Office were more likely to invest in funds without a three-year performance track record when compared to Retail Investors and SMSF Trustees.

The list below shows the top reasons investors selected for why they would consider investing in a fund with less than a three-year track record.

• 67%: Prior track record of the investment team/individual
• 57%: Aligned investment/management team (skin in the game)
• 56%: Prospect of returns 
• 49%: Fund objective that meets a specific need in your portfolio
• 42%: Unique strategy or exposure
• 36.7%: Attractive fee structure 

So which Undiscovered Funds are on the radar of Livewire Readers?

Survey participants were asked to share the funds with less than a three-year performance record that they had invested in or were aware of. I’ve been through the list and limited the selection to funds launched since the start of 2020. I’ve also removed ETFs as many of these were covered in our recent Listed Series.

Important note: The information is taken from survey responses from Livewire readers and is not intended as a recommendation to invest in the funds below, nor is it an endorsement of the products.

The barriers investors face when investing in funds with less than a three-year track record

The biggest barrier to a new fund attracting investment is a lack of familiarity with the fund manager. The importance of a fund's ‘key person’ and the role of trust has come up in every conversation I’ve had with professional and private investors looking at this space. 

This is a meaningful barrier for individual investors who are unlikely to get the same level of access to the fund manager when compared to professional investors such as Family Offices and Wealth Managers/Advisors.

Even if you’re able to get comfortable with the individual, then high minimum investments, levels of risk (real or perceived) and a lack of data all present meaningful barriers.

What would deter you from using a fund with a less than a three-year track record?

Resources

These are a few resources you can use to help stay on top of new funds that enter the market. 

• Livewire: New fund managers regularly post their insights and contribute on Livewire. Use the FIND FUNDS page to review performance, philosophy and fees
• Morningstar: Provide data and ratings on managed funds
• Australian Fund Monitors:  A Database of managed funds
• The AFR - Street Talk: Fund launches and news on the movement of key people are often covered in this column
• Linkedin: Fund managers will announce if they are starting a new firm/fund

How do you discover new funds entering the market? 

Let us know in the comments section below.