Eight hidden gem funds investors are missing out on 

Good active funds aren’t always easy to find – and to add to the pressure, portfolios tend to generate their best returns when they are smaller and less well-known.

There are all sorts of reasons behind this, from the drive and ambition of a younger fund manager to the fact that they don’t have the responsibilities that come with running a bigger fund to distract them.

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The appeal of such funds, and how to find them, is a theme we addressed in a recent episode of our On The Money podcast. 

That saw fund selector Simon Evan-Cook point to a handful of his own “hidden gem” funds of the past, from WS Havelock Global Select A GBX Acc to the now giant Ranmore Global Equity D GBP.

As we discussed, resources such as fund manager interviews (you can find our video series on YouTube here) and even social media might serve as one place for your initial research. 

But a more quantitative approach can also help you identify some promising names, and here we touch on a handful of smaller funds with plenty of appeal.

Our hunt for hidden gems

In a bid to find a few overlooked outperforming funds, we ran data to identify those that have a high information ratio, and assets of between £10 million and £100 million.

Why such criteria? We wanted to ensure the funds weren’t too large, and a £100 million ceiling does mean they should still be nimble, while we avoid the really tiny funds by setting a minimum size of £10 million. 

We meanwhile looked at the annualised information ratio over three years versus a fund’s benchmark. 

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The information ratio is a metric used to indicate a manager’s ability to generate excess returns versus a benchmark but also accounts for the amount of risk taken.

Generally speaking, an information ratio of at least 0.4 points to a good level of manager skill.

As our results show, finding funds that meet all these requirements is not always easy, and no funds from Europe or Japan tick all these boxes at the moment. 

The information ratio also tends not to throw up many options from the investment trust world, meaning this analysis is limited to open-ended funds.

The global funds making the cut

Our analysis throws up a variety of smaller funds with good outperformance and (seemingly) a skilled manager. These have some pretty different approaches.

First, a few global equity portfolios make the cut. The first one to crop up, IFSL Meon Adaptive Growth P GBP Acc, only launched back in 2022 and appears to have an approach guided by quantitative methods. 

It has a flexible approach, with no minimum or maximum allocation to a given part of the world, and recently had a 46.2% allocation to North America, with 38.4% in Europe and just 8.4% of the portfolio in UK shares.

As is sometimes the case with smaller, more niche funds, Meon Adaptive Growth’s approach is not totally clear. 

The fund’s website points to the fact that the investment team uses computer modelling “to assess numerous financial measures of the companies within the scope of the fund’s investment policy”, but does not specify what these measures are.  

Source: FE. Past performance is not a guide to future performance.

The portfolio itself includes a plethora of different companies, normally on small position sizes, from aerospace and defence names such as Curtiss-Wright Corp, Howmet Aerospace Inc, GE Aerospace and Leonardo SpA Az nom Post raggruppamento to media companies Fox Corp Class A and New York Times Co Class A, as well as Alphabet Inc Class A and a handful of European banks. 

The site does not break out the fund’s geographic exposures.

It’s easier to understand the thinking behind some other names in the list. Take SVS Aubrey Global Conviction Ins, which targets growth stocks around the world “in a concentrated and index-agnostic fashion” and can deviate substantially from the MSCI All Country World index. 

The fund tends to be biased towards mid-cap shares and wants companies that are producing earnings growth of at least 15% over a forecast two-year time horizon, have a 15% forecast return on equity, as well as being highly cash-generative, with a cash flow return on assets of at least 15%. 

The team also looks for some other traits commonly favoured by growth investors, from good management teams to a strong business franchise.

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The team notes that its “demanding growth requirements” can lead it towards higher-growth regions of the world, and Aubrey as a firm does already invest in such areas via funds like Aubrey Global Emerging Markets Opps RC1£. 

The global fund has 9% in Taiwan, with Taiwan Semiconductor Manufacturing Co Ltd ADR as its top holding on a 5.3% position. It also has some money in South Korea. 

However, the fund is still very focused on developed markets, with the US accounting for 70% of assets.

If we look at other top holdings that includes StoneX Group Inc, Comfort Systems USA Inc, Broadcom Inc, Vertiv Holdings Co Class A, InterDigital Inc, Delta Electronics (Thailand) PCL SGDR and Alphabet. 

StoneX acts as a broker in areas such as commodities, Comfort Systems USA provides mechanical and electrical services, InterDigital provides wireless and video technologies, and Delta Electronics is a Taiwanese electronics manufacturer.

Some other global names make the cut: think of IFSL Marlborough Global SmCp X GBP Acc, which has around 40% of its portfolio tied up in the US and a big allocation to industrials. There’s also one global income fund in the form of Jupiter Merian Glb Eq Inc (IRL) I £ Inc.

Outside the US

We had to move the goalposts to include any UK fund at all in this analysis, and have accepted an information ratio of 0.31 on SVS Zeus Dynamic Opports Ret A GBP Acc for the sake of showcasing one fund.

The Zeus fund has a big focus on small and mid-cap shares, while in terms of investment style the manager combines positions in quality growth companies with “tactical value” investments.

Its top 10 holdings list includes some of the big beasts, from BP and Tesco, to Rolls-Royce Holdings, Barclays and GSK. 

But around half the fund is actually in “small-cap, AIM and other”, with a 15% allocation to mid-cap shares. Its big sector weightings are to pharma and healthcare, financials and technology.

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Finally, it’s worth noting that a number of funds stand out, for now, in Asia and the emerging markets. To touch on one of them, IFSL Marlborough Far East Growth A Acc doesn’t immediately look that different from the crowd.

It has big positions in some of the region’s leading names, from TSMC to Samsung Electronics Co Ltd DR, SK Hynix, Tencent Holdings Ltd and Alibaba Group Holding Ltd ADR, with big allocations to China, South Korea and Taiwan. 

A lot of the portfolio is in large and mega-cap shares. Neuberger Berman Em Mkts Eq GBP I Acc is similar, although these results might point to the fact that a handful of Asian stocks have recently driven plenty of the returns.

The caveats

These funds can look promising but it is worth asking what drives returns and what a manager’s strategy is. 

Smaller funds can also come with higher fees, at least initially, and may be at greater risk of closing after failing to achieve commercial success. But such funds can pay off handsomely if things do work out.