Are you wise to follow a star fund manager?

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The Independent Online

Should you wish upon a star? Media stardom is a double-edged sword, as Nicola Horlick found when the press focused last weekend on why her company, Société Générale Asset Management (SGAM), had lost the mandate to run a fund for St James's Place, the investment arm of the HBOS banking group.

Should you wish upon a star? Media stardom is a double-edged sword, as Nicola Horlick found when the press focused last weekend on why her company, Société Générale Asset Management (SGAM), had lost the mandate to run a fund for St James's Place, the investment arm of the HBOS banking group.

Mrs Horlick came to public prominence five years ago after she had flown to Frankfurt to complain about her treatment at the hands of her then employer, Deutsche Morgan Grenfell. The media targeted her as the icon of a working mother standing up for herself in the male-dominated City. She subsequently set up SGAM as chief executive under the banner of Société Générale, and has capitalised on her media coverage by featuring prominently in the operation's advertising.

Some investors tend to put their faith in fund managers who are in the news because the "stars" are putting their names on the line, so arguably have a greater incentive to do well. Besides, it is easier than doing your own research.

But when things turn badly or the star moves to another fund, both the star manager and their investment fans may find they have made a rod for their own backs. Star fund managers tend to find the spotlight turned on them far more readily than on their more retiring counterparts. Investors can suffer if bad publicity inspires a panicked withdrawal of funds.

In the latest report, Mrs Horlick was accused of taking active management fees while running the fund as a "closet tracker". These are funds which perform as if tracking an index such as the FTSE100, which can be done by a computer. Star fund managers are expected to do more than that in return for their glitzy fees.

A spokesperson for SGAM said: "All fund managers have to operate within the guidelines set down by their clients and these can vary enormously. Against a general background of the worst performance of shares in 30 years, everyone has been experiencing a tough time. Despite this, we have performed strongly and in the case of St James's Place were one of the two best performing funds managers last year.

"The portfolios managed by Mrs Horlick and her team were substantially restricted at the asset-allocation level by the client. Nonetheless, performance was strong at the stock-picking level, which is the job the team was tasked with. Mrs Horlick's performance and record with SGAM speaks for itself, and both SGAM and Mrs Horlick are appalled at recent unfounded allegations that suggest anything other than a totally professional approach to her responsibilities."

The cult of the star may be media-driven, but the impact on performance can be real enough if things go wrong. Charles Ansdell, of the adviser InterAlliance, said: "If everyone is following the star, the fund will have to sell up the assets in an open-ended fund to pay off the investors leaving, and those that remain will suffer poorer performance as a result. With closed-ended funds, such as investment trusts, you do not seem to see the same following of star fund managers as in unit trusts and OEICs (open-ended investment companies). This may be something to do with the marketing of the funds."

The biggest star defection of recent times was the move of Nigel Thomas and George Luckraft from ABN Amro to Framlington last year. The pair managed £1.3bn of funds, about 90 per cent of the total at ABN Amro. Mr Ansdell called this "a classic example of stars leaving. All the discount brokers said investors should bail out and ABN Amro's investment business virtually closed down." It was effectively bought by Artemis and the funds were merged under one name.

But to those who consider themselves serious students of performance, talk about stars is merely offensive. Mark Harris, head of investment management at Edinburgh Portfolio, said: "I might be able to comment if there was a definition of a star fund manager. It is not an analytical term we would use as it is unquantifiable. What we look for is technical expertise in terms of assessment of stocks and its valuation characteristics."

Not everyone is negative about the star culture. The Citywire analytical group bases its fund assessment methodology on following managers rather than funds, and two years ago the former Jupiter boss, John Duffield, set up New Star – an entire fund management operation centred around hiring stars. Mark Skinner, New Star's retail managing director, points to performance in the top 25 per cent of their sector for all the funds with the exception of New Star UK Growth.

Part of the problem is that to retain the services of star managers fund management groups offer them management positions as well as other institutional mandates on top of more money. But, ironically, in trying to keep hold of their stars, they put them in positions where their performance may wane, so they lose their star in any case.

New Star believes people will only be successful by doing what they like to do, so its fund managers concentrate on just that. But some advisers are now keener to look at houses with a team-driven approach.

Ryan Hughes, of the Bath-based adviser Chartwell Investment Management, highlighted Threadneedle as an example of a big house with no star names because of a team-driven approach. He also mentioned Massachusetts Financial Services (MFS) from Boston, Massachusetts, a recent UK entrant offering three funds, as the most extreme example of this approach.

"They only name fund managers because it is a legal requirement, but in fact there is just a group of analysts who invest using a consensus approach," said Mr Hughes. "In general, we are wary of star fund managers. Clients get worried when managers leave.The star leaves and that leaves the fund looking mediocre."

But the acid test is performance. As our table shows, it may be hard to come to any firm conclusion on that criterion. All the funds show negative returns, but the latest yearly figures show New Star's as the least well-performing of those selected.

However, the company replaced the original fund manager, Alan Miller, with Invesco Perpetual's Stephen Whittaker only last January and apparently the latest figures indicate a turn-around in performance has been achieved.

This favours the star theory, because if things are wrong it is easier to replace one person, rather than a team. But this can also be a weakness, according to Mark Campbell of JP Morgan Fleming, who said: "You are at risk of the star fund manager going under a bus. We always have two fund managers working so if one is incapacitated the other can continue."

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