Should you follow fund managers when they leave?
You may have prospered with a stock-picker but it can pay to persevere with the fund rather than following the star man, says Emma Dunkley
Sunday 16 December 2012
When you entrust your money with fund managers, you hope that not only do they have a safe pair of hands, but they are among the best at doing what they do and will stick around for years or even decades to come.
So after making this leap of faith, the last thing you want to hear is your fund manager has left the fund, for whatever reason. You are now exposed to a conundrum: should you sell out, or stay put?
As with many problems in life, there is no one simple answer. But you can be sure that the moment your manager exits, it is time to review your situation. "The first thing is when a manager leaves, you need to do your homework – shooting first is not the right answer," says John Chatfeild-Roberts, a top fund selector at Jupiter Asset Management. "A key point is that investors should never panic."
In the past couple of weeks it has emerged that a couple of high-profile fund managers are handing over the reins of their funds. Anthony Nutt, one of Jupiter's most established and revered managers, is passing a couple of his flagship unit trusts to Ben Whitmore and Philip Matthews, marking his first steps towards retirement.
"We believe in Whitmore we have a worthy successor," says Mr Chatfeild-Roberts. "When, in 2000, William Littlewood resigned, Anthony took over the fund and took it to new heights. We suspect the same thing will happen with Ben."
Rather than making any knee-jerk reactions once your manager has left, you might consider taking a "wait and see" approach in many cases. "If the fund essentially remains intact and the process and style remain the same, it is worth giving the new manager a chance to prove themselves," says Ben Willis at Whitechurch Securities.
Selling can leave you with potential tax liabilities, as well as transaction costs and being out of the market, so it's not as simple as just selling – this action has a number of implications.
However, it's not always the case that the successor will be any good at running your money, so there are a few factors to consider. For starters, it's worth finding out how much of an influence the individual fund manager has on investment decisions.
"Some managers have a great deal of discretion, while others work much more as part of a team," says Patrick Connolly of AWD Chase de Vere. "Certain investment companies, such as Newton, JPMorgan, Aberdeen and Threadneedle, adopt a strong team-based approach, and so if a manager leaves, it often makes little difference to the investment decisions or how the fund is run."
You should also try to find out, via your independent financial adviser or the fund group, why the manager has left. Are they retiring, as in the case of Mr Nutt, or are they leaving for other reasons, which may lead you to question whether the manager is discontent and could this happen again?
"The reason for leaving is important," says Rob Morgan at Hargreaves Lansdown. "If the manager has underperformed and is effectively being pushed out, then the change could well be for the better. If, however, a successful fund manager leaves, his replacement should be scrutinised."
In Fidelity Special Situations, Mr Morgan says Hargreaves Lansdown took it off its Wealth 150 list of top funds when it learnt that Anthony Bolton was going to step down. However, it was re-added in 2010 after Mr Morgan had a longer track record to assess the new manager, Sanjeev Shah. "We didn't suggest that people sell at any point though," says Mr Morgan. "Overall, investors have not had as steady an outperformance from Shah, but he has added value, as clearly did his predecessor."
A lot of firms are restructuring their fund ranges, which is leaving some renowned managers on the sidelines. Last week, Newton Investment Management announced that it was streamlining its UK equity range, in a move that sees manager Tineke Frikkee removed from the Newton Higher Income fund, while her role with the firm is under discussion.
"Tineke Frikkee is a big name, but she has not been at the top of her game over the last few years," says Mr Willis. "You can understand them wanting to replace her, but it seems odd that they are then going to completely change the investment process; a process that is the bedrock for several other successful Newton income funds."
Indeed, if the fund manager goes and the investment process is overhauled, you have to ask yourself if these changes undermine your thoughts behind buying the fund in the first place. "You need clear reasons why you have that fund, so then you can assess the change and the relevance of that manager," says Rob Burdett, a fund of funds manager at Thames River.
Mr Burdett says he scores the teams working behind each fund on a range of factors, including how broad their experience is, the number of people working in the team, their length of service, areas of specialisation, among other points. Realistically, it will be tough for you to find out the same level of information, but these are questions you should be aware of, which your adviser can ask on your behalf.
But then the question of whether you should just leave and go with the old manager springs to mind. "You should only follow a fund manager if you have confidence that they will be able to replicate their performance elsewhere – but often they can't," says Mr Connolly.
"It is no coincidence that those fund managers who have the best reputations in the industry are usually those who have stayed with the same investment company for an extended period of time – think Neil Woodford, Nigel Thomas, Hugh Young, Angus Tulloch, Tom Dobell, Graham French, John Chatfeild-Roberts and Ian Spreadbury," Mr Connolly adds.
On the other side of the coin, you might be wondering what all the hype is surrounding individual managers, especially in those cases where they work with a large, robust team on the fund.
"The investment industry places far too much focus on so-called star investment managers," says Mr Connolly. "The reality is that there are very few star fund managers, and many of those purported as star managers have long since disappeared into the ether."
And even those who could fall into the star fund manager bracket do, without exception, have periods of underperformance.
So, on hearing your manager has left the fund and your money behind, it is wise not to panic and react impulsively, but you would do well to review the situation. Remember not to blindly follow the manager, as it is not always the case they can stay at the top of their game.
Emma Dunkley is a reporter for citywire.co.uk
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