Star fund managers: success doesn’t always last forever
Recent years have encouraged the cult of the ‘star’ investment manager, usually built on the long-term investment records of high-profile stock pickers. Yet in the wake of the Neil Woodford fund suspension, the very notion of the star fund manager is being called into question, especially when it comes to revered money managers going it alone.
Having their own name above the door can feed already huge egos and there is the danger that a star manager’s views go unchallenged, potentially leading to costly blunders.
Usually when a manager with a lengthy and much-lauded track record strikes out on their own there is accompanying industry fanfare. This includes speculation about what they might do differently, whether loyal investors will follow the manager to their new fund house and which ‘best buy’ lists the new portfolio may appear on.
This happened when Julie Dean launched Sanditon Asset Management, Richard Pease set up Crux Asset Management and when Neil Woodford set up Woodford Investment Management.
Yet analysis of past performance data suggests investors should proceed with caution when stock pickers with stellar reputations ‘go solo’, since they usually suffer a drop in returns after leaving their former employer.
Many investors will follow a successful fund manager when they leave on the assumption they’ll stick to their investment knitting and continue to outperform. However, as the Woodford affair demonstrates, investors are now doubting whether they were right to follow the manager as he went solo.
Woodford suffered such a sharp reversal in his investing fortunes since leaving Invesco that dealing has been suspended in his LF Woodford Equity Income (BLRZQ73) fund. The saga provides a salutary warning to investors not to plough cash into a star manager’s fund on name alone.
That said, it is important to stress that any manager can go through a bad patch. We remain supportive of many well-known names in the industry and certainly do not believe that the Woodford situation should put you off star managers completely.
Instead, it should act as a lesson to better understand your exposure and as a reminder that someone being famous doesn’t guarantee they will produce excellent results indefinitely.
If you’ve backed a star manager, or are considering doing so, make sure you understand what’s in their portfolio and their strategy. If you are not comfortable or simply don’t understand it, then steer clear. And never put all of your money in a single fund as diversification works to your advantage with both assets and fund managers.
Anthony Bolton: The star who fell to earth
Pre-Woodford, the star manager famed for falling to earth with a bump was contrarian value investor Anthony Bolton. He previously held the title of Britain’s most famous stock picker.
His Fidelity Special Situations Fund (B88V3X4) returned 19.5% per year from December 1979 to December 2007, relative to 13.5% for the FTSE All-Share. A £1,000 investment would have turned into a staggering £147,000 over that glorious period.
Bolton retired as a full time fund manager in 2007, but he then surprised investors by returning to manage the Fidelity China Special Situations (FCSS) investment trust in 2010. He stepped down in 2015 following a disappointing performance which reflected his apparent misunderstanding of Chinese business culture and a bias to small and mid-cap companies that didn’t fare well in the years following the global recession.
The trust’s level of gearing (borrowing) only served to amplify losses. The lesson from Bolton’s foray into China? Just because an investment strategy worked in one market at a particular time does not mean it will translate into a different market at a different time.
THE CONCEPT OF STAR MANAGERS
Annabel Brodie-Smith, communications director at the Association of Investment Companies, says to become a star manager the individual will have overseen a period of stellar performance and will have built up a strong reputation which attracts other investors. ‘There is no guarantee that a star manager’s strong performance can be sustained and they can underperform and fall from favour.’
Brodie-Smith says star managers are under more scrutiny which can be a positive but also exacerbate problems when they underperform.
‘Star managers of open-ended funds generally manage big funds, which can be a benefit in terms of scale and influence but can compromise the managers’ investment selection. Some funds are co-managed by two or more managers or a team of managers. This approach leads to a diverse range of skills and experience, healthy debate and allows for succession planning for the future.’
Who are the star managers of today and tomorrow?
Aside from the now humbled Woodford, the best-known fund managers in the UK today are Terry Smith, the former analyst and City CEO turned fund manager who launched Fundsmith Equity (B41YBW7) fund in 2010, and Lindsell Train’s Nick Train.
Smith puts money to work with high-quality companies that can sustain a high return on operating capital employed. While Fundsmith Equity has performed very well, the returns from Fundsmith Emerging Equities Trust (FEET) haven’t been as impressive and Smith recently stepped back from the day-to-day running of this particular trust.
Other feted names in the market include James Anderson at Baillie Gifford’s popular Scottish Mortgage Investment Trust (SMT) and Francis Brooke at Troy Trojan Income (BZ6CQ39).
Less well-known names with the potential to become higher profile in the future include Man GLG’s Henry Dixon, JOHCM’s Alex Savvides, Evenlode’s Hugh Yarrow, TwentyFour Asset Management’s Chris Bowie, Janus Henderson Investors’ Laura Foll and Invesco’s James Goldstone.
STATUS ISN’T EVERYTHING
Thomas McMahon, senior analyst at Kepler Trust Intelligence, a research group, believes the concept of a star manager is actually unhelpful.
He says: ‘It is important not to make an investment decision based on a fund manager’s name, but to investigate how and why a particular fund or trust has been successful and consider whether those factors are likely to continue in the future.
NEED FOR RELEVANCY
McMahon stresses no strategy or style will do well in all environments. ‘And while there may well be a skill element to fund management, a skilful player of darts may not be a skilful player of croquet.
‘This is important to consider when a fund manager sets up on their own: do they have a track record in what they are trying to do? If not, then their track record may be essentially irrelevant to their chances of success and should not feature in the investment decision much at all.’
He also flags the danger of ‘style drift’, where a manager deviates from the formula that made his or her reputation.
‘This is potentially a major red flag and needs serious investigation,’ adds McMahon. ‘Fund managers should be able to tell a coherent story about how their approach should lead to success, and its drawbacks too. If they can’t, or if their actions don’t match up to their words, that is the time to reconsider.’
QUESTION THE TRACK RECORD
Seasoned investor Colin McLean, managing director of SVM Asset Management, says that even when a cult is built on the long-term investment record of a money manager, the precise basis of a record may not be questioned by investors.
‘There is a certain amount of randomness that the industry is good at creating narratives around,’ he informs Shares.
McLean warns that the result of the star manager cult can be ‘monster funds’ that become victims of their own success. Raising huge chunks of money provides a short-term win for an asset management firm as they collect fees, but does it always mean this is good for investors?
The Scotsman also points out that despite public perception of the ‘lone star manager’, few investors work alone and so the performance track records are often the result of a team effort.
WHY MANAGERS STRIKE OUT ALONE
Star managers decide to strike out alone for a variety of reasons. Some have long-held ambitions to establish their own investment firm with their name above the door. Others feel their investment strategy is compromised by a house view or become irked by an over-zealous compliance team.
But running a fund is very different to running a business and the performance of these managers seems to take a hit when they go it alone.
John Monaghan, head of research at Square Mile, cautions that the day-to-day running of a business is different to the day-to-day running of a fund.
‘Remember that when they set up their own business, myriad factors can distract a star manager – previously they had the support of large research teams, analysts, sales departments and marketing teams, but after striking out alone, they’ll have to operate in a leaner environment,’ he adds.
WHO HAS GONE IT ALONE?
The most recent star to strike out on their own is Alexander Darwall, who is leaving Jupiter to set up his own outfit, Devon Equity Management.
Other examples in recent history include legendary emerging markets manager Mark Mobius, who retired from Franklin Templeton, then stunned the market by launching his own asset management boutique. He also poached Carlos Hardenberg and Grzegorz Konieczny, two of the American firm’s most well-known portfolio managers, to help him manage the Mobius Investment Trust (MMIT).
Paul Marriage made his name at Cazenove and Schroders, most notably with Schroder UK Dynamic Smaller Companies (B5VQ012), where he generated average annual outperformance of 8.32% according to AJ Bell’s research.
He left Schroders in 2017 and together with former colleague John Warren set up Tellworth Investments, launching LF Tellworth UK Smaller Companies (BDTM8B4) at the end of November 2018. This £92m portfolio follows the same investment process as they used at Schroders and, since launch, has returned 11.25% versus 3.88% for its benchmark.
‘In his previous years at Invesco on the income fund Neil Woodford delivered annualised “alpha”, which is outperformance of the index, of 4.3%. Since setting up alone he has underperformed the index by an annualised 7.2%,’ says Laura Suter, personal finance analyst at AJ Bell.
‘The trio of managers who set up Sanditon Asset Management are another example, with Julie Dean and Chris Rice outperforming their relevant indices at Schroders, but significantly underperforming in the following years.
‘While some fund managers have outperformed the index after going it alone, such as Richard Pease at CRUX Asset Management and Barry Norris at Argonaut, they still haven’t managed to generate as much alpha as they did at their previous company.’
Nick Train – Lindsell Train
Best known for: Lindsell Train Investment Trust, Finsbury Growth & Income and Lindsell Train UK Equity Fund.
Style: He’s a near 40-year veteran of the markets and is known for having a buy-and-hold approach, often going a long time between adding new names to his portfolios. He focuses on high-quality businesses with strong cash generation to underpin growing dividends.
10 year annualised return: 19.5% (for Finsbury Growth & Income Trust, source: Morningstar)
Terry Smith – Fundsmith
Best known for: Fundsmith Equity
Style: Revered for his buy-and-hold approach to investing and focus on firms with strong barriers to competition. Smith made his name as an analyst uncovering companies’ creative accounting techniques in the seminal 1990s tome ‘Accounting for Growth’.
5 years annualised return: 23.0% (for Fundsmith Equity, source: Morningstar)
Hugh Yarrow – Evenlode Investment Management
Best known for: Evenlode Income Fund
Style: Yarrow steers TB Evenlode Income Fund (BD0B7C4) with co-manager Ben Peters. He seeks out sustainable real dividend growth through a focus on asset-light companies with high returns on capital and strong free cash flow.
5 year annualised return: 12.7% (for Evenlode Income, source: Morningstar)
Alex Savvides – JO Hambro Capital Management
Best known for: JOHCM UK Dynamic Fund
Style: Savvides believes the market’s misunderstanding of corporate change – typically new management teams with new strategies – regularly throws up opportunities for patient, disciplined and unemotional investors.
This approach typically leads him to high quality, unloved and under-researched UK companies, often in out-of-favour areas of the market.
5 year annualised return: 8.0% (for JOHCM UK Dynamic, source: Morningstar)
The only person to buck this trend is Nick Train, who underperformed the index on an annualised basis when he ran money at M&G, before having sterling outperformance in the subsequent years.
Suter notes that he has been running money at Lindsell Train for far longer than he was at M&G, meaning he has benefited from investing through different market cycles.