Track record is important, but don’t let the perceived fund manager’s “lack” of it preclude it for being a good investment opportunity. On the contrary, there is much research to suggest that emerging managers often outperform fund managers with a track record.
Cambridge Associates: this leading consultancy says that “Broad-based value creation across sectors, geographies, and funds means success is no longer limited to a handful of (often inaccessible) fund managers. Moreover, top returns are not confined to a few dozen companies. New and developing fund managers consistently rank as some of the best performers.“
As the table outlines below, the top 3 performing funds in 2016 were either New or Developing. The fact that there are many more orange boxes than grey ones in the other years indicates that emerging funds rank higher than those managed by experienced fund managers:
Pitchbook: on page 24 this highly regarded data services firm says that “VC first-time funds post significant outperformance with less downside risk”.
The graph below says that a greater percentage of first-time funds produced returns of over 25% than fund managers’ later series funds. The lowest percentage of funds that produced negative returns were “First Time Funds”, suggesting that they are less risky to invest in than more experienced fund managers. Interestingly larger funds with over $1bn of assets performed the worst collectively, with a sizeable number of those funds producing negative returns - so size does not matter.
So why are these funds outperforming?
Hungrier – emerging managers have more to prove than established ones. Fund managers investing their first and second funds have to succeed to fulfil the ambitions they have for their investment business as a whole over the long run.
Niche spot – emerging managers are often specialists that exploit niches that have not yet caught the attention of other fund managers, thus experiencing less competition for their investments.
Smaller scale – these managers by virtue of being emerging often have less capital to deploy, thus reducing their chance of failure. When a fund has more capital to deploy, there many be a tendency to lose focus and discipline, but the opposite is true with less capital to invest.
Desire for personal wealth – the wealth accumulated by established fund managers can be excessive. This may act as a disincentive to achieve further wealth for themselves and their investors, in comparison to emerging fund managers.
At Mara, we do not ignore emerging managers and recognise their potential for outsized returns. Create an account with us to view our current fund opportunities to invest with emerging managers.