Loyalty means many people follow their favourite fund manager when they move to a different employer, but investors may not realise the damaging effect this can have on the fund they leave behind.

Funds sometimes become so synonymous with the managers who run them that if he or she departs it can cause an exodus
of investors too.

High profile managers such as Neil Woodford and Richard Buxton gain such a loyal following that investors will often follow them to a new fund house.

But experts argue this is not always the best decision. The success of a fund is rarely because of a single person; often a vast team of analysts and researchers contribute to its running and, in the event of a manger resigning, there is generally a long handover period to a new manager to ensure a smooth transition.

RISK OF FUND OUTFLOWS

Brian Dennehy, director at Fund Expert, says: ‘I have never known a good fund become a bad fund simply due to a manager change. There are clear processes in place which can be continued even after a manager leaves – we see the lead manager merely as a caretaker.’

Yet funds frequently experience significant outflows when a star manager moves jobs as nervous investors pull their money out.

It’s hardly a vote of confidence for the new incumbent, and it also makes it harder for them to outperform as they try to manage a dwindling pool of assets. In the end, what inevitably determines whether a fund can survive after a ‘star’ departs is its performance.

Ryan Hughes, head of active portfolios at AJ Bell, says: ‘It’s important to tread carefully when a high-profile manager stops running a fund.

‘The rush for the exit door by investors can cause all kinds of problems for the new manager as they try and manage a shrinking fund, which forces them to constantly liquidate their holdings. These outflows can last for months or even years, creating a significant headwind for the new manager.’

EXAMPLES OF STAR FUND MANAGER DEPARTURES

We looked at five funds which have experienced high-profile manager departures in recent years and found that just one is now seeing positive net inflows from investors and has achieved greater returns than its sector average under new leadership.

When Neil Woodford left the £13.8bn Invesco Perpetual High Income (GB00BJ04HQ93) fund in 2014 to start up his own firm investors pulled £2.9bn out of the fund in the 12 months after his departure.

Since taking the helm new manager Mark Barnett has delivered a return of 19.4% compared to an average of 24.5% in the UK All Companies sector. Today the fund stands at £9.2bn.

Richard Buxton left the Schroder UK Alpha Plus (GB00B5L33N61) fund in 2013 to move to Old Mutual Global Investors where he is now chief executive. The fund lost £2.2bn
of its £3.6bn worth of assets in the year after his move and is now down to £899m.

Replacement manager Philip Matthews has delivered a return of 32.3% since taking over compared to an average of 44.9% from the UK All Companies sector over the same period.

But Dennehy at Fund Expert points out that the issue could be the fund’s strategy rather than its manager. ‘Just because a fund is headed by a so-called star manager it does not necessarily follow that the fund will also outperform.

‘Woodford is a current example of this situation – his equity income fund is currently in the bottom quartile of its sector, down 12.9% over the past year compared to an average positive return of 0.3% among its peers,’ he explains.

BOUNCING BACK

Some £587m was pulled out of the £868m Miton UK Value Opportunities (GB00B8QW1M42) fund when co-managers George Godber and Georgina Hamilton moved to Polar Capital.

The replacement manager Andrew Jackson has seen outflows stop over the past year and the fund has started growing again and is now £393m in size. He seems to have restored investors’ faith after delivering a return of 39.8% since taking over in 2016 compared to a UK All Companies sector average of 22.8%.

Jackson at Miton says: ‘Taking over someone else’s fund is not as easy as starting with a blank sheet of paper. It’s like moving into a house where you need to do some redecorating – you go in and make some initial changes and other things you get around to over time.’

He gave himself three months to get the portfolio in shape, changing around a third of the holdings.

The manager sold UK consumer stocks such as Dixons Carphone (DC.) and a housebuilder, bringing in industrial companies such as metering and control business Spectris (SXS).

But revamping a portfolio is hard when you’re experiencing a mass of investor redemptions.

‘Managing an expanding fund is definitely easier and more fun that managing a contracting one, but it does force you to constantly re-evaluate the portfolio and how it is going to make money,’ Jackson explains.

FINAL POINTS TO CONSIDER

Investors should make sure they understand the structure at a fund before they invest in it – including who makes the decisions and whether it is run on a team-basis or by a key individual.

Understanding the investment process will make it easier to make an informed decision about whether or not to stick with the fund in the event that there is a manager change.

So-called ‘key man risk’ may be more prevalent at smaller investment firms where there is less resource and teams may be smaller. (HB)

‹ Previous2018-04-05Next ›