Is it time to ditch the star managers?
When it comes to picking a fund manager, most investors follow the herd and go with someone renowned for stellar performance. But in 2011, several so-called star managers hit the skids with their funds returning little or no profits. So is it time to abandon these famous faces or should we stick with them in the hope they will return to form?
Last year was certainly difficult for some of those managers previously considered the safest hands in the business. Anthony Bolton was the most high-profile example; his foray into China has proved a baptism of fire, with his Fidelity China Special Situations fund down 38% over the year. It was also a rough 12 months for Sanjeev Shah, manager of the Fidelity Special Situations fund, which fell by 17%. Philip Gibbs, the well-respected manager of the Jupiter Absolute Return fund, was also glad to see the back of 2011 – his fund grew by just 0.4%.
There were individual problems behind each manager’s poor performance. Bolton, for example, mistimed the launch of his China Special Situations fund – it arrived just before a prolonged period of weakness for the Chinese markets. Meanwhile, Shah took a risk and remained overweight in economically sensitive companies that have been sold off by more risk-averse investors.
Gibbs, in contrast, was extremely bearish, refusing to hold all but a relatively tight range of low-risk bonds. All this shows that these managers are not infallible, but will their investment choices pay off in the long term?
The price of style
It has been a difficult time for certain management styles, says Kerry Nelson, managing director at Nexus Independent Financial Advisers. “Markets have been sentiment-driven. There has been no rhyme or reason to the underlying valuations for fund managers to make the decisions that they would usually make. These particular managers won’t make short-term decisions and tend to stick to the bigger picture, which can look contradictory right now.”
Patrick Connolly, a financial planner for adviser group AWD Chase de Vere, points out that share prices are being driven by macroeconomic factors such as the problems in the eurozone rather than by how well companies themselves are actually performing, which has been a problem for those managers who focus heavily on company analysis and valuation.
But he adds: “Even without these high levels of uncertainty and volatility it would be a mistake to think that any fund manager will perform well all of the time. An example of this is Neil Woodford, manager of the Invesco Perpetual Higher Income and Income funds, who quite often gets left behind when stockmarkets perform well but usually outperforms in diffi cult markets.”
What are the star managers worth?
If you had invested £1,000 when these star managers launched their funds you would be sitting on a small fortune by the end of their tenure.
Anthony Bolton – Fidelity China Special Situations
17 December 1979 to 31 December 2007
£1,000 would have been worth £155,540*
Comparable FTSE 100 data unavailable
Philip Gibbs – Jupiter Financials
30 June 1997 to 31 October 2011
£1,000 would be worth £6,010*
FTSE 100 +19.6%, £1,196
Neil Woodford – Invesco Perpetual High income
29 February 1988 to 13 December 2011
£1,000 would be worth £16,260*
FTSE 100 +211.4%, £3,114
*These returns do not factor in any fees associated with the funds
Source: Morningstar, 13 December 2011
Connolly says it is important to stick with good quality fund managers over the long term and not head for the exit if there is a short period of poor performance.
Until as recently as July 2011, Woodford’s short-term record looked weak, but as markets turned his large investment in defensive companies, particularly pharmaceuticals, proved the right choice. His funds are now fi rst and second in the UK Equity income sector over one year. Woodford is by no means an isolated example.
There are other managers who have the skill to keep performing. On the bond side, Robin McDonald, co-manager of Cazenove’s multi-manager range, highlights Richard Woolnough at M&G, whose analysis of the macroeconomic environment and its effect on bond markets has been consistently sound - his M&G Strategic Corporate Bond fund has returned 44% over three years.
Adrian Lowcock, senior investment adviser at Bestinvest, says: “Just because one or two fund managers have suffered in the current climate doesn’t mean that the star managers of a previous era should all be cast away. All managers will have periods of underperformance – even the best.” For example, McDonald is currently buying more of Shah’s Fidelity Special Situations fund.
“He has had a tough run and we haven’t had money with him for a long time,” McDonald says. “But markets have derated economically sensitive companies enough and we are using his fund to express this view in our funds. We recognise he is a good manager who has simply had a difficult time because of his style of management.”
However, this presents investors with a challenge. How do they determine who is simply having a bad run and who is permanently bust? Connolly says: “Some managers establish consistent, long-term track records, while others may appear to have good performance because they have made a few big bets and got lucky. The investment industry likes to hype-up fund managers because this means they will be more popular with investors and take in more money.”
The big names of tomorrow
Carl Stick, Rathbones Income
Kerry Nelson, managing director at Nexus Independent Financial Advisers, says: "I am always impressed by a manager who learns from his mistakes. Stick had a blip early on in his career and has come back stronger."
Chris Higham, Aviva Strategic Bond
Robin McDonald, co-manager of Cazenove’s multi-manager range, says: "Higham has done an extremely good job on this bond fund – it’s more than 10% ahead of the sector over three years."
Philip Rodrigs, Investec UK Smaller Companies
Adrian Lowcock, senior investment adviser at Bestinvest, says: "Rodrigs is still one of the youngest fund managers in the business but his track record is impressive."
Risks to watch out for
Investors need to be alert to certain risks: funds that become too large can see performance wane. Plenty of managers can run large funds effectively – Neil Woodford runs £22 billion of assets successfully.
But, a fund manager’s style will dictate whether size will hamper performance. Woodford tends to invest in large, income-generative companies, in which he can deal in large sums. Smaller companies’ managers have often struggled to maintain performance as funds have got larger simply because they struggle to fi nd more firms to invest in.
Connolly says: “Some funds also establish a strong track record when the fund size is relatively small, meaning the manager can be more nimble. However, funds that perform well tend to attract more money and so become larger, at which point the manager may struggle to repeat the previous strong performance.”
Paying over the odds
Another issue to watch out for is paying over the odds for success. Some management groups try to charge a premium for access to their ‘stars’. Given the unpredictability of star performance, it is generally a premium not worth paying. One way to get good performance without paying a hefty price is to hunt for the star managers of tomorrow. There are always new managers nipping at the heels of yesterday’s ‘superstars’.
However, investors shouldn’t pour their money into funds managed by fresh-faced graduates either. Lowcock suggests looking for the managers who have achieved consistent performance over fi ve to 10 years but who are still young enough to stay in the business for many more decades. He highlights Tom Dobell, manager of the M&G Recovery fund, who has more than 10 years’ experience but could still be running funds for another 20 years – his fund has produced an annualised return of 8.56% over the past decade.
Lowcock adds: “Philip Rodrigs of Investec UK Smaller Companies (now 30) was the youngest fund manager in the City when he started five years ago and has impressed with returns of 136% in just three years.”
The final question for investors is whether searching for star managers is really worth it.
Couldn’t they just stick cash in a FTSE 100 tracker? Fees are lower and many fund managers do not perform better than the market. The dilemma for investors is that with passive investment they will avoid the lows of a bad investment decision, but they may miss out on the highs of a really good investment too. Investors can get too caught up chasing ‘stars’.
Ultimately, the aim should be to ignore the hype, try to find the fund managers with the most consistent performance and build a diversified range of funds.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.