Is investment a game for star performers?
When a big name quits a fund, clients face a dilemma.
Friday 03 May 2013
There's a strong chance that part of your pension or savings are held with at least one of the investment world's handful of star fund managers, but what happens when they move on to pastures new?
Like Bill Gates in computing or Sir Philip Green in retailing, investment can be a personality-driven business, with the names of guru investors on billboards and posters at train stations and city centres up and down the country. But their employers must balance the risk that comes when their star man (and it is mostly men) gets a better offer from a rival, retires or simply decides to take a break.
In 2006 Anthony Bolton, arguably the UK's most celebrated investor, announced his intention to step down from Fidelity Special Situations, a fund he had managed with aplomb since 1979, returning annualised growth of around 19.5 per cent. At that point the vehicle had become the country's largest open-ended fund at £6.5bn, but without an obvious successor of Mr Bolton's calibre, the fund was split. Market conditions play a huge role, of course, but successor Sanjeev Shah has so far been unable to match his mentor's record, though he has beaten the FTSE All Share Index since he took on the fund in May 2007.
Coincidentally, Mr Bolton has just celebrated the third anniversary in charge of his new vehicle, China Special Situations, which too has so far struggled to beat its benchmark, a reminder that there are no guarantees in this business.
Last month, it was announced that the UK equity luminary Richard Buxton is to leave Schroders in June to take up a new role at Old Mutual Global Investors. Mr Buxton's Schroder UK Alpha Plus fund currently stands at a whopping £3.4bn – so should his investors sell out and follow him to his new employer, or stick with the fund under its new manager, Philip Matthews, himself poached from Jupiter Asset Management?
Harry Morgan, head of UK private investment management at Thomas Miller Investment, sees Mr Buxton's defection to Old Mutual as a "Ronaldo to Everton" move which will help a "very good team move up a level".
He adds: "I tend to come down on the side that says Schroder units should be maintained rather than switched. For new money though, Old Mutual with Buxton on board will definitely be worth more of a look. Old Mutual was already on the radar for its fixed interest and mid-cap equities expertise, and our clients hold investments here. The key space for market share is large-cap UK equities, and Buxton is indeed a huge signing".
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, stresses that there is no simple rule when it comes to staying loyal to fund managers. Each instance has to be judged on its own merits, with the circumstance of the change or the manager's investment style as key considerations.
He adds: "Buxton has a distinctive style which is very hard to replace; however, other aspects of his style mean there is not a great urgency to sell. He does not tend to 'trade' his portfolio, preferring to buy and hold, so investors do not need to panic."
Highlighting how quickly things can turn around, it is worth noting that Mr Matthews joins Schroders from a Jupiter UK equities team that is itself adapting to change. He had been assisting Ben Whitmore on the £2bn Jupiter Income Trust, which the latter has just taken on from another departing big-name manager, the retiring Anthony Nutt.
As per the Schroders fund, Jupiter's investors have had to contend with whether or not they should keep faith with the strategy. However, it is worth noting that Mr Nutt himself took on the fund in 2000 from William Littlewood, yet another star fund manager with an enviable record who left the industry to much fanfare before returning with Artemis in 2005.
In his 12 years at the helm of the fund, Mr Nutt achieved about 110 per cent total return, compared with 90 per cent from the UK Equity Income fund peer group. In this case then, investors would arguably have been right to stick with the fund. However, it is notable that Mr Nutt's performance had dropped off – according to FE Analytics, he has underperformed vs his peer group over one and three years – so perhaps his timing is right to retire.
Another star fund manager who has left his post very recently is Mark Lyttleton. His initial success on BlackRock's UK Dynamic and UK Absolute Alpha funds cemented his place as one of the most talked-about fund managers of the past 10 years, particularly given the latter fund's place in the blossoming Absolute Return sector. However, having initially taken a three-month sabbatical last year, Mr Lyttleton has now decided to leave BlackRock for good, with both of his funds having underperformed in recent years.
"With regards to the funds managed by Anthony Nutt and Mark Lyttleton, both had suffered disappointing periods of performance prior to the fund managers ending their tenure, and as a result it was probably timely in both cases to see a fund manager change," says Gavin Haynes, managing director at Whitechurch Securities.
Picked out by Mr Haynes and others as an example of when it was right to follow the fund manager rather than the fund is Nigel Thomas's move from ABN Amro, where he was subcontracted to run the Solus UK Opportunities Fund, to AXA Framlington. He manages the latter's UK Select Opportunities Fund, which has grown nearly 280 per cent over the past 10 years.
"The Solus UK Opportunities fund nose-dived, whereas investors in Thomas's other funds had very good returns while he was at the helm," notes Darius McDermott, managing director at Chelsea Financial Services.
Commentators are unanimous in their belief that fund groups are more reliant upon star managers than they have been in years gone by, though perhaps this is a good thing. After all, if they are paying for their services, investors want individuals who are not overly constrained in the way they run their funds and are willing to put their convictions to work rather than "hugging" a benchmark. If not, there are always tracker funds and exchange traded funds which are cheaper but will only replicate the fortunes of a stock market, such as the FT-SE 100.
However, Mr McDermott suggests groups are not as attentive to key-man risk as they perhaps should be. "Companies would like to think that they are less reliant on star managers than they were 10 or 20 years ago, but you just have to look at the mega franchises and soft closures we have today to see that this is not necessarily the case and star managers are just as prevalent."
The soft closures he refers to are another, perhaps more desirable, hazard of employing a star manager when funds become so large to the extent that it compromises the manager's ability to deliver the best results possible. In this case, it is right for the fund group to restrict inflows. A recent high-profile example is Troy Asset Management Francis Brooke's £1.1bn Trojan Income Fund, while Aberdeen Asset Management has slapped on a 2 per cent initial charge on its phenomenally popular multibillion-pound emerging markets fund range, headed by Devan Kaloo, in an effort to deter new investment.
"Once funds get to several billion pounds in size it gets very hard to manage processes, but soft closing and raising entry costs all contribute to this picture," says Lee Robertson, CEO of Investment Quorum.
No man is an island and these managers would be the first to acknowledge the role of the teams of analysts and co-managers that help to build their success. A winning process does not necessarily stop working overnight just because of a personnel change.
Dan Briggs, chief investment officer at Fleming Family & Partners, argues that fund management has become more complex over the past two decades with the introduction of new assets and instruments, and regulations relaxed on how and what funds can invest in.
"This has demanded new approaches and systems to analyse data, assess risk and make judgements, making it less easy for individual star managers to excel," he says.
"Having said this, investment is in essence an art and not a science. It relies on having strong single-minded conviction, and rarely works when based on team consensus. As a result many successful star managers who have immense flair and aptitude have endured. However, very often they are supported by an unsung team in the background."
For Mr Haynes it is about accountability and, however large a group or team, it should be the lead fund manager – always paid handsomely – who is responsible for performance.
"A process is only robust if implemented correctly by talented individuals. This is a headache for fund management groups and it is frustrating when a fund manager you hold in high regard leaves. However much the investment house states that the success was process-driven, the fact is that investment management is people-driven and talented individuals will be hard to replace."
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