Unique Investment Opportunities in “Unrated” Funds
In last week’s Australian Financial Review (26.08.18) Mr Paul Burgon who runs an ultra-high net worth boutique wealth management firm based in Sydney stated that:
“clients were increasingly looking for access to unique investment opportunities, including funds that did not have research ratings”. He added that many of these “alternative funds closed quickly” to new investment.
As an alternative investment manager, we have found that just like in stocks some of the best investment opportunities lie in funds that have no “rating” by the big rating agencies.
There are number of reasons for this:
- Unrated funds are generally smaller in nature and as result can be more nimble in how they move in and out of the markets.
- They tend to focus on absolute returns rather than owning stocks because their part of an index.
- Many boutique managers also invest significant amounts of their own net wealth in their funds which means they tend to apply investment strategies and have investment mandates that are more flexible in nature.
- The proprietary investment made by fund managers into their own funds also means that investor’s interests are aligned with the managers. We find this a reliable indicator of future positive fund performance.
- Conversely fund managers that manage institutional investments generally have zero of their own capital invested in the funds there managing and hence little incentive to maximize absolute performance. The size of these funds is usually much larger than the size of boutiques.
- Additionally, rating agencies will generally not rate funds that have a shorter-term track record then three years. However, our research shows that some of the best returns in funds can be found during the funds early years of existence.
Also, it is important to understand that ratings published by rating agencies are by nature biased as it’s the fund manager whose fund is being rated that pays for the rating. As a result, this type arrangement leads to very big conflicts of interest and of course makes it very hard for a rating agency to give a fund a bad rating. Hence, in actual fact there is little value in the ratings produced by rating agencies.
Unfortunately, many of bank-owned wealth managers find it “incredibly difficult to get sign-off on anything that doesn’t have a research rating behind it”. Which means that investors with the large banks and bank owned financial planning groups miss out on some of the best fund investment opportunities simply because their financial planner can not offer them a “unrated” fund.
”there is little value in the ratings produced by rating agencies”
Furthermore, many of the best “unrated” funds close their doors quickly as they have capacity constraints on their strategies. This means that investors who miss out on getting invested in these funds can also miss out on many years of future higher rates of return.
At BlackPearl Capital Partners we scour the market looking for the best managers on the street that employ unique investment opportunities which are generally impossible to replicate by individual investors. Last year the BlackPearl Masters Fund top 3 performing funds all generated rates of return above +30%. All these funds were “unrated” and beat all the “rated” funds.
These funds are now closed to new investors. Fortunately, due to our established relationships with these fund managers investors that invest in the BlackPearl Masters Fund can still get access to these top performing funds.