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Comment: Timing investments by the fund life cycle

Shoham Cohen, co-founder of Singapore-based hedge fund service provider ESC Financial Services, says that while many professionals and investors in the industry are aware of the fund life cycle theory, few seem to be managing their investment portfolios accordingly.

In today's investment world, it's becoming fashionable to argue in favour of emerging fund managers, as more professionals in the industry - including fund managers- come to recognise the potential contribution that emerging funds can add to a portfolio.

I am happy with this trend. Consider, for a moment, that there are more than 10,000 alternative funds out there. It means that there are many unknown but talented managers who are able to achieve better results than their benchmark, but perhaps are less popular or don't have the marketing skills of their better-known competitors.

Of course, the main challenge is to identify the next rising star among the new kids on the block. Therefore one needs to implement stringent due diligence, and other screening methods such as site visits and reference checking to ensure that the selected star continues to shine brightly.

The discussion surrounding emerging funds should be regarded as a fundamental stage of rejuvenating an investment portfolio. Make no mistake about it, like most funds new funds will go through the funds life cycle and its four stages of introduction, growth, maturity and decline.

Nonetheless, I believe that these are the type of funds to which investors should start exposing their investment portfolios. The more I look, the more I realise that low-profile funds are unspoiled and could be a booster to a portfolio for the longer term.

Historically, in most cases high-profile funds will add less value. I worry that when a fund becomes too popular, it's likely to be due to intense marketing based on historical performance and brand-building that may result from high exposure and inflow of investments.

While I don't believe anyone can directly extend a life cycle of an individual fund, with the right portfolio management an extension of a life cycle for the investment portfolio is possible.

When I first arrived in Asia around five years ago, the industry's focus was on the balanced portfolio theory of 50 per cent in traditional instruments, and 50 per cent in alternatives. Everyone from financial advisers to private bankers attempted to design their portfolios this way. Five years later, most professionals and investors still adhere to the balanced approach, although many factors and drivers in the industry have changed.

We should look to improve our portfolios by evolving with the times, and balanced theorists should allow emerging fund managers to comprise up to 20 per cent of their portfolios. Emerging funds should be thought of as the first step toward rejuvenating an investment portfolio - it could provide better returns, a better capital protection mechanism, a longer-term investment prospect, and updated investment tactics, strategies, and tools. The funds life cycle is a contemporary portfolio theory that might enable investors to boost their performance and protect against downside phases in a solid manner.

Many investors are under the false impression that the right time to invest in a fund is when it has a long track record, and large assets under management. Timing is definitely a critical issue when choosing to enter and exit a fund. However, the funds life cycle theory suggests that the optimum time to enter a fund is when it has lower assets and a shorter track record.

It's disturbing that many investors, notably institutions investors and family offices, significantly narrow down their choice of fund managers by looking for at least a five-year track record, and more than USD300m in assets under management. These funds are likely to have reached their maturity phase and in most cases have already enjoyed their most fruitful period of returns.

A good investor should identify an emerging fund and allow a certain exposure to the fund. During the investment period, they should closely monitor the fund's progress from the introduction phase all the way up to growth and maturity.

We should never have any sentimentality about our fund managers, only toward our own portfolio. Once an investor feels a fund is no longer productive to the portfolio, there should be an integration process with another emerging fund and complete replacement thereafter. While many professionals and investors in the industry may be aware of it, only a few appear to be actually managing their investment portfolios in this way.

I believe the fund life cycle will be the next trend in portfolio management, and future portfolio generations will comprise funds in three different phases: introduction, growth and maturity. This will offer an enhanced timing management macro tool for investors and increased returns.

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