Investment: Fund superstars may find their lost sparkle
Poor fund manager performances could simply be a matter of investment style
Wednesday 03 March 1999
In the 12 months to the end of January, three of the best known equity growth funds, Schroder UK Enterprise (managed by Jim Cox), Fidelity Special Situations (run by Anthony Bolton) and Gartmore UK Smaller Companies (run by Frank Manduca), produced negative returns in a period when the market as a whole has risen. (The Footsie up 9.4 per cent; the All-Share up 9.2 per cent over the same period).
Other well-known fund managers who have been feeling the draught from indifferent performance include Tony Dye of PDFM (the longstanding bear of Wall Street) and two of Perpetual's star fund managers, Stephen Whittaker and Neil Woodford. Perpetual being among the most successful fund management companies of the past decade and priding itself on its track record of good performance, its tribulations must be particularly galling. What is one to make of this humbling of the superstars? One natural reaction might be a dose of schadenfreude. Successful investment managers are very well paid for their labours and some people will doubtless find enjoyment in observing such figures struggling to justify their corn.
Others may conclude that fund managers are no different from other professionals. In a high- pressure business, such as fund management, where there are plenty of keen young Turks waiting to fill your seat, it may be these established names have simply lost the plot. But it has to be more than coincidence that so many of those who have recently lost a little of their lustre follow a style of investment that has similar features. Several who have recently underperformed the market or their peers have one of two things in common. Either they have traditionally had a bias towards smaller companies or their methods are rooted in so-called value investing, which favours shares that appear cheap over shares which are growing or moving fast.Both styles are out of fashion. Smaller companies as a class have seriously underperformed those of the largest capitalisation shares.
And by refusing to pay what would be historically high prices for today's best performing shares, many value investors have suffered from the increasingly narrow focus of the market's behaviour over the past 18 months to two years on just a few fashionable sectors. They are telecoms, pharmaceuticals, utilities, anything with an Internet association. The stock market's continued strength, here and to a lesser extent in America, has now become dangerously concentrated on a handful of large and well-capitalised companies. They operate in international markets, which are today's stock market darlings, but they trade on multiples of earnings and cash flow inordinately high by conventional standards.
We are seeing a momentum- driven market that no self- respecting value investor could find appealing. Most gain recorded by the Footsie index in the past year has been focused on a few companies. It is unhealthy and normally an indication that some market correction is overdue. While the fund managers are sweating over their continued poor performance, what should their investors do? Search for a rival fund with a more appealing track record? Or wait for the return of better (or more normal) times? The answer is probably neither. It may be better to give more money to the very good fund managers who are having a rough time. History suggests that these moments are one of the few times when it makes sense to look for outstanding individual skills.
Although most fund managers never really earn their money over time (which is the root reason for putting a good chunk of your money into index-tracking funds), there are some exceptional talents who can and do justify the fees they charge.
The problem is that it is usually far from easy either to spot the real stars in advance, or to find an opportunity to buy into their expertise at a price that makes sense.
No really exceptional professional investors will change styles just because the market is temporarily out of synch with their methods, so it follows that one of the few times when you can profit from their talent is when the market appears to have left them behind. The hard fact is that every genuinely first-class investor, from George Soros and Warren Buffett down, has experienced periods of awful returns by comparison with the short-term performances of his peers.
It is silly to judge a professional investor by performance over anything less than three years. What matters is whether you can analyse the reasons for the underperformance and see if it is a matter of style (which is cyclical) or something fundamentally wrong.
You can safely bet that most of the fallen stars will be back among the leaders before long. If you can buy into their skills at an attractive discount (eg through an investment trust such as Anthony Bolton's Fidelity Special Values), now is the time.
One of the great bargains of last year was the chance to buy into Mark Mobius' emerging markets fund at a 34 per cent discount. There will be others of similar attraction as long as the current market conditions prevail.
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