On the face of it this new fund launch from Schroders looks quite appealing. The managers can invest more or less as they wish with the aim of holding around 30 of their highest conviction stocks. And their focus will be on companies that can benefit from climate change, ageing populations and the growing significance of emerging economies.
This all sounds sensible, so what issues should you consider?
Probably the most important is the potential risk. Focussing on just 30 companies will likely result in higher volatility than the Index, meaning more sleepless nights if you’re a nervous investor. For example the Schroder UK Alpha Plus fund, which also invests in around 30 stocks, has been about 1.3 times more volatile than the FTSE All Share Index over the last 3 years.
The likelihood that the fund management team will succeed in beating the Index is also important (else you might as well buy a tracker fund). The two lead managers, Virginie Maisonneuve and Jonathan Armitage, have run the Schroder ISF Global Equity Alpha offshore fund since launch in February 2006, beating the MSCI World Index overall to date. However, while solid, their performance has not been exceptional; the fund has under-performed the Index in two of the four years since launch.
Given the concentrated nature of the new Global Alpha Plus fund, the managers’ investment strategy and stock selection will be paramount and you'd expect a natural bias towards larger companies (especially as the fund grows in size). The climate change theme hasn’t worked especially well so far for Schroders on its fund of the same name, which has generally underperformed the MSCI World Index since launch in 2007, although the long term strategy is plausible. The large healthcare companies that should benefit from ageing populations have also tended to lag the markets in recent years, although again the longer term argument seems convincing. Factoring the growth of emerging markets into investment decisions also sounds a good idea, although in practice this is one that most global fund managers already adopt to some extent.
The annual management charge is 1.50% and the estimated total expense ratio (i.e. impact of all annual charges) is 1.75%, although this may fall over time as the fund grows. The initial charge is a hefty 5.25% but most discount brokers should reduce this to zero.
On balance I’m positive about this fund, but find it hard to be especially so. The idea sounds good on paper but the managers’ existing track record of running a global fund hardly blows me away. It would be helpful if Schroders published the impact on performance of the 30 largest holdings in the existing offshore global fund, as this might give a clue to whether the managers’ highest conviction ideas have been good or bad for overall performance.
I doubt the fund will flop but I’m not yet sufficiently convinced about the managers' skills to invest my own money. Plus the potential risks mean this fund may be inappropriate as a core portfolio holding for global exposure.
The fund launches in May.