Does a fund need more than one person to run it?
Two heads are better than one, the old adage goes – but when it comes to investing in funds, it could be more of a case of ‘too many cooks spoil the broth’ in terms of the people looking after your money.
There are more than 2,000 funds available for UK investors to put their money into and each has a different approach to investing.
While some fund managers choose to go it alone, others are supported by a co-manager or use a team of analysts to help them decide what makes it into the fund. But does the number of people involved in running portfolios have any bearing on the success of the fund?
Ryan Hughes, head of fund selection at AJ Bell, says: ‘The key thing for me when choosing a fund is the process and the investment philosophy. You can have an individual manager with no team who has a great process and does very well, or a huge team with a bad process and it will do badly.’
Who is making the decisions?
Evaluating how decisions are made within a fund can be difficult. Some investors are genuine lone wolves – Terry Smith, for example, who set up his own investment house so he could manage his own fund according to his own philosophy. That’s Fundsmith Equity (GB00B41YBW71).
Some star managers, such as Anthony Bolton formerly of Fidelity, are often thought of in isolation but will have had a large network of support to do a lot of the groundwork.
Other managers may appear to be part of a duo or team but may be more independent when it comes to having the final say on investments.
Hughes says: ‘It’s important to understand who is making the decisions to understand key man risk.
‘At Fundsmith, for example, Terry Smith’s individual thinking is integral to the process; if you take him out of the equation it’s not the same. If he left the fund you would most likely sell that same day.’
Some duos also spark the same reaction. Hughes recently removed Schroder UK Dynamic Smaller Companies (GB0007219818) from his favourite funds list after managers Paul Marriage and John Warren left to set up their own company.
He says: ‘Who has responsibility for pulling the trigger on the fund – whether it’s an individual, team, duo or algorithm – is an important question but it is only part of the jigsaw. And there is no real way of evaluating which is the best approach.’
‘I do not invest in any funds with joint managers'
David Lewis, of the Jupiter Merlin multi-manager team, avoids any fund where there is more than one person making the decisions.
He says: ‘We are fundamental believers in funds with one trigger-puller. I do not invest in any funds with joint managers. It’s about getting away from groupthink or situations where investments make it into portfolios because it’s easier.’
He is concerned that in large teams with an overseeing manager, the number of holdings in the fund goes up while conviction in those holdings is lower and performance suffers.
The funds in which he invests may use broker research or the help of analysts, but the final decision has to be made by a single manager to get his backing. He does consider funds where there are two managers, such as Evenlode Income (GB00B40SMR25), as long as there is a clear leader.
‘We don’t mind how they go about it, but we want the judgement to come down to an individual. We want people who trust their own judgement,’ he adds.
It may seem logical that some funds naturally require a larger team – specialist sectors or emerging markets, for example, where a fund may want boots on the ground in various countries.
But Hughes disagrees; he points to the Jupiter Emerging Markets team which is based in London. He says: ‘That manager is doing great work and producing good performance without having a team spread around the world, which shows it’s about the process and the ideas.’
Sometimes you need a big team
One asset where more pairs of hands can be helpful, concedes Hughes, is in fixed interest where thousands of individual bonds all require in-depth analysis.
Succession planning can also be a grey area, where a lead manager is slowly handing over the reins to his replacement. This could spark a sell-off if the process is changing as a result, but where there is a smooth transition the shift may be acceptable.
Lewis comments: ‘When Angus Tulloch passed the Stewart Investors Asia Pacific Leaders (GB00B57S0V20) fund to David Gait we had to assess his track record and how successful we thought he would be; not how the fund had fared under his predecessor.’
When Stuart Parks left Invesco Perpetual Asian (GB00BJ04DT45) and when James Harries left Newton Global Income (GB00B84QJT19), Hughes kept the funds on his favourites list because the successors had been gradually taking control and meeting investors over a period of time.
Hughes says: ‘When there is more than one manager in charge you risk management by committee and groupthink rather than individuals being empowered to take responsibility, to understand their own strengths and weaknesses and to be accountable for their own decisions.’
DISCLAIMER: Daniel Coatsworth, who edited this article, has a personal investment in Fundsmith Equity.