Best ideas funds a timely product, says Young

Along with a bond fund and a global financial services fund, Georgian is launching two “Best Ideas” funds — the Georgian Global 24 Fund and the Northern 24 Fund. The latter invest in as many as 24 stocks, representing the best of their respective industries. These funds are new additions to Georgian’s pooled funds, begun in February, offering the same thing at a $150,000 minimum investment.

Fund analyst and president of FundMonitor.com, Duff Young, contends that these sorts of “Best Ideas” funds are themselves a great idea. More Canadian fund companies should be launching them, he says. In the U.S., a third of the top-selling funds are using this approach, he estimates.

The whole notion of “Best Ideas” is derived from brokerage research departments. Many of them offer periodic reports of their best ideas or “focus lists” which amount to their must-have core stock picks. Young says this approach has a great deal of intuitive appeal. Many investors who are becoming skeptical of active management may be more persuaded that the “best” is something worth paying for, says Young.

“If you believe that fund managers are smart people, it makes sense that you’d like to see them boil down their ideas to their very best thinking,” says Young.

A number of Canadian fund companies have launched so-called “Select Managers” funds where the best ideas of several managers are pooled into one fund. These are a good idea too, says Young. But he has some reservations. For example, you don’t get a single manager focused on just 20 or 30 stocks. The ideas still come from managers covering dozens of stocks. If you hold a couple of these funds, over-diversification negates any big bets one manager may make and it becomes hard to beat the index, so investors end up paying a lot for index-like performance.