Innovate or die?

New investment companies continue to raise sizeable sums, even in these volatile times for global markets. As data published recently by Money Observer magazine points out, 19 investment company IPOs picked up £3bn of funding during 2018, up from 15 new issues raising £2.5bn in 2017 and only four new launches worth £964m in 2016.

That’s impressive growth by any standards, but all the more so given the market backdrop. While 2017 was a golden year for markets, 2018 was anything but; persuading investors and advisers to back newly-launched funds with no track record last year must have been challenging to say the least.

The secret of the sector’s success lies in its ability to innovate – to identify new value propositions that meet investors’ evolving needs. For many years, the funds industry pursued a “me too” approach, with managers rushing to launch copycat products if a rival experienced a marketing success. Investment companies are now advancing a different strategy, recognising that in a crowded marketplace, it is only new launches with a clear point of differentiation that will command the attention of investors and their advisers.

The recently-launched funds that Money Observer highlights in its article on new issues are all good examples of this idea. For instance, it points to AVI Japan Opportunity, which has a very specific mandate to invest in small Japanese companies with no debt and plenty of balance sheet cash; it also singles out Merian Chrysalis, offering exposure to unquoted companies.

The more high-profile launches in the sector of late, including Smithson and Mobius Investment Trust, also offer something different – respectively, a particular take on smaller companies and a different option for emerging markets investors. Their big-name managers, Terry Smith and Mark Mobius, have undoubtedly been instrumental in securing support, but the investment products themselves nevertheless offer something different.

This is how the investment industry, when working well, moves forward. Every single fund sector today – including those with hundreds of funds collectively worth tens of billions – has its roots in a moment of innovation. At some point, a fund manager had the foresight to recognise investors’ needs weren’t being met by the product range on offer at the time and moved to close the gap.

This doesn’t mean all new issues will perform well or trigger sustained growth in a new corner of the funds industry. The past is littered with examples of funds that felt like a new direction at the time but subsequently disappointed for one reason or another. In any case, fund launches reflect the circumstances of the moment – in a few years’ time, for example, the current obsession with income may pass if interest rates move back to more normal levels.

Still, there’s an important point here. Investors need strong management and good performance from the managers to whom they entrust their money. That’s a given. But sometimes they also need something new – a different type of investment product designed to meet a need that wasn’t previously a priority. Investment companies’ embrace of innovation – and a closed-ended structure better suited to risk-taking and new ventures – can be invaluable here.