The best boutique funds to buy and hold

How do you choose a fund? Many of us seek refuge in the big brands: we assume that there is some extra safety in established names and that somehow the bigger the firm, the more rigorous the research and analysis, and the better the fund performance. We are completely wrong. According to a survey done by Moneyspider.com back in March, funds run by smaller companies known as boutiques are actually better buys.

Looking at the performance of 2,000 funds available to British investors, Moneyspider rated each one against others in the same sector but also measured their cash yields and their performance relative to their particular benchmarks. Funds were then ranked from A (best) to E (worst). First State, Rathbone and Neptune, all boutiques, took first, second and fourth places respectively, with 90% of First State's funds rated as either A or B. Meanwhile, high-profile groups such as NatWest, Scottish Widows, Abbey, Halifax, and even Fidelity, languished at the bottom of the list. The fact is that "some of the biggest and best-known management groups offer some of the worst-performing funds", says Bill Ross, managing director of Money Spider in The Mail on Sunday.

This research didn't come as a surprise to all. "Boutiques not only enable managers to run money as they want to, they also allow managers to participate in the profits of the business", says Jonathan Polin of Resolution Asset Management in Financial Adviser. Even if they don't own the company, it's likely that they will have shares in it (this is usually the carrot that gets them to leave solid jobs with established firms to join the boutique in the first place). So if they don't do well and money begins to be withdrawn by nervous investors, their own bank accounts suffer. Or, as Stephen Snowden of Old Mutual tells the FT, "if you perform, you are compensated, if not you are out of a job". Boutique fund managers also tend to be encouraged to show their faith by putting large amounts of their own money into their funds as Bill Mott has at PSigma: this makes them less inclined to be careless with the cash. Finally, note that the smaller the firm, the more likely managers are to be given the freedom to invest as they like using their own stock-picking methods rather than according to a prescribed set of centrally set investment rules.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Currently, interesting boutique funds to look at include the Rathbone Income Fund, managed by Carl Stick, the Argonaut European Alpha Fund run by Barry Norris (which consistently outperforms) and, for those who worry about the planet yet want to make money too, Neptune's Green Planet Fund.