The risks of investing in conviction funds might be greater, but so too are the potential rewards, according to the latest issue of The Cerulli Edge-European Monthly Product Trends Edition.
With the surge in passive investment set to continue, Cerulli Associates notes in an editorial that conviction funds represent the opposite end of the spectrum, offering an attractive alternative to "closet trackers" masquerading as active funds.
"While tracker funds are investing in hundreds of stocks, as they follow the S&P 500 or the FTSE All-Share, a conviction fund chooses a relatively small number of holdings, often less than 30, and stays with them for longer. They tend to outperform," says Barbara Wall, Europe research director at Cerulli.
Cerulli cites two Jupiter funds – Jupiter European and Jupiter European Growth – as examples of successful conviction funds. Investing in 38 and 36 holdings respectively, these funds have beaten their benchmark handsomely over one, three, and five years.
"An obvious criticism of conviction funds is that they are higher risk," notes Brian Gorman, an analyst at Cerulli. "But fans argue that the risk may lie in having too many holdings. Those with the necessary research capabilities, either because they are part of a big team, or are operating in a niche with specialist knowledge, can reap the benefits of the perceived mediocrity of the others, by going into the conviction space."
Despite the overwhelming current and looming regulation – including Markets in Financial Instruments Directive II,Undertakings for Collective Investment in Transferable Securities IV/V, and the Alternative Investment Fund Managers Directive – asset management performed well in 2014, notes Cerulli in its analysis of mutual fund trends, showing a 13% average year-on-year increase in assets under management (AUM) across every European market.
Mutual funds with investment strategies focused on bonds and asset allocation enjoyed increased inflows during 2014, which reflected a change in investor sentiment compared with the previous year when equities were the preferred asset class, according to Cerulli analysis. However, the global analytics firm is predicting that in 2015 investors will be bearish on bond funds.
The environment for emerging market equities in December 2014 was difficult, with seven mutual funds suffering outflows of more than EUR100 million (USD113 million) during the month, compared with just four with inflows in excess of EUR100 million, notes Cerulli. Aberdeen Asset Management's Global Emerging Markets Equity fund suffered the greatest outflows in 2014, and in December it slipped to third place in Cerulli's ranking by AUM, behind Genesis and BlackRock.