Should you follow the star fund managers?
When results turn against a football manager the tabloids are quick to whip up hysteria, supporters chant for the manager's head and club chairmen face mounting pressure to fire the man in charge.
In the investment fund universe, things aren't nearly as dramatic but there can be just as much focus on how well a manager is performing – especially when an incoming manager has recently taken over from a top performer. It's no surprise investors scrutinise the person at the top; after all, our money and even our future financial well-being is in their hands – and that's a tad more important than whether our team beats Arsenal at the weekend.
There have been two particularly well-publicised examples of so-called ‘star' fund managers moving in recent years. In December 2007, Anthony Bolton retired as manager of the Fidelity Special Situations fund – a vehicle he had managed for 28 years. During that time, the fund achieved average annual growth of around 19.5%, turning an investment of £1,000 into £147,000.
Bolton's popularity resulted in the fund becoming so large that Fidelity split it in two in September 2005, creating a UK Special Situations fund (managed by Bolton) and a Global Special Situations fund, to be managed by Jorma Korhornen from January 2007. At that time, Bolton also announced he would step down from the UK fund in December 2007, to be replaced by Sanjeev Shah.
Investors responded by selling up. In 2007 alone, investors pulled out of the Global fund to the tune of £508 million, while £335 million was redeemed from the Bolton-run UK fund – before the man had even left.
A more recent example is Neil Woodford's abdication as manager of the Invesco Perpetual Income and High Income funds - which had a respective £10 billion and £14 billion in assets under management. In mid-October 2013, he announced his decision to retire in April 2014 but by December 2013 investors had sold around £2 billion worth of his funds.
Should investors panic?
When a respected fund manager leaves, investors panic. But should they? In the world of investment funds, managers come and go for a variety of reasons; some expected, others less predictable. As with any employment sector, fund managers routinely fall out with their bosses, some seek a fresh challenge, some do not survive a corporate restructuring, and others are simply let go due to poor performance.
But the people in charge at investment management groups are no fools: they are likely to have succession plans in place for their top managers to ensure performance continues robustly. Moreover, when a star fund manager leaves, he is often allowed to pick his own replacement – a strong sign that, at the very least, the fund might continue to be managed in the same style, if not with the same flair.
"Each fund manager change has to be looked at individually – it's not a simple case of saying always follow a manager to a new company or fund," says Darius McDermott of Chelsea Financial Services. "A manager may be very good but move to another company and find the working environment doesn't suit them. Or they may move from a big company to a small company and find they struggle without a large team to support them.
"So, generally, when there is a change of manager on a fund we change its rating from a buy (or sell) to a hold. This is because we like to meet the new manager and assess their experience, their style and what changes they may make to the portfolio or process. Only after that meeting, and sometimes after a good 12 months, will we then decide to either upgrade the fund to a buy or downgrade to a sell."
When Fidelity announced the changes to the Bolton funds in 2005, McDermott was true to his word - he immediately put both funds on hold and stopped recommending the Global fund.
The past year or two has seen a number of other high-profile manager changes. Jupiter's Tony Nutt handed the Jupiter Income fund to Ben Whitmore; Richard Buxton left Schroders to go to Old Mutual; Graham French retired from M&G Global Basics; and it was even announced that Bolton's successor, Sanjeev Shah, would be handing Fidelity Special Situations to Alex Wright.
"Each of these changes has its own individual issues and only time will tell what the right move for investors will be," McDermott adds.
None of it is personal, of course. Investors rarely feel any affinity with the manager of their investments – indeed, many have no idea who manages their money. Performance is the only thing that matters.
In the three years before Bolton stepped down at Special Situations, his fund notched respective annual performances of +27.7%, +16.3%, and +4.22%. In the three years after, the fund returned -24.9%, +28.7% and +14.1%. This averages out at a three-year return of +16.1% pre-Bolton's departure versus +5.9% post-Bolton.
Similarly, Bolton's average ranking relative to the UK All Companies sector across the three years before he left was 70th, compared to 107th achieved by Sanjeev Shah in the three years after Bolton left.
|Fund||Manager||Performance in year before departure||Performance in year post-departure*|
|Fidelity Special Situations||Anthony Bolton||4.22%||-24.86%|
|Schroder Income||Nick Purves/Ian Lance||29.71%||11.17%|
|Jupiter Income Trust||Tony Nutt||7.29%||25.77%|
|Schroder UK Alpha Plus Acc||Richard Buxton||33.30%||14.95%|
|Jupiter Absolute Return||Philip Gibbs||-1.81%||1.60%|
|M&G Global Basics A Inc||Graham French||3.73%||-2.24%|
|Fidelity Special Situations||Sanjeev Shah||31.67%||0.88%|
* With the Buxton, Gibbs, French and Shah funds, post-departure figures are only for a respective 7 months, 5 months, 2 months, and 2 weeks. Source: Morningstar
Keeping hold of the money
Investors shouldn't be fooled into automatically believing a fund management group when it ‘talks up' the benefits of sticking with their fund after a star manager has left.
"When a fund manager leaves, investment companies are primarily concerned with keeping investors' money. The last thing they want is all of the money they are managing heading out of the door," says Patrick Connolly, an IFA at Chase de Vere. "They will therefore make reassuring noises that it is business as usual and nothing will change, whether this is the actual reality or not."
Moneywise looked at the performance of two recent fund manager moves and found in both cases performance dipped in the year following departure. Bolton's successor turned a 4.22% gain into a fall of 24.86% in his first year in charge. Similarly, Nick Purves and Ian Lance's successors at Schroder Income, Nick Kirrage and Kevin Murphy, turned a gain of 27.91% into a gain of 11.17% (though any return of over 10% is certainly not to be sniffed at).
The reasons for a dip in performance can be varied. A new fund manager might not have as much experience as their predecessor, for example. Or they simply might have got lucky in the past. That goes for the outgoing manager, too – many star fund managers fail to live up to expectations when they move.
That said, it's not always the case that fund manager moves lead to a decline in performance. "There are a few exceptions to us placing funds on hold immediately when a manager move is announced - for example, when Guy de Blonay took on Jupiter Financial Opportunities from Philip Gibbs back in 2011," explains McDermott.
"We knew Guy from his previous positions with New Star and Henderson, where he had run a similar fund very well, so we had no hesitation in maintaining a buy rating in this instance. But it is only rarely that a new manager is as well known, has such a good track record and, importantly, would be running a very similar fund."
Many advisers do not subscribe to the idea of the so-called star fund manager in the first place. The investment industry, after all, is happy to highlight star managers because they know it will entice money from investors desperate to obtain superior investment return. "The reality is there are very few star fund managers and many of those purported as stars have long since disappeared into the ether," says Connolly. "Even those who could fall into the star fund manager bracket all have periods of under-performance."
Connolly likes those investment companies, such as Newton, JPMorgan, Aberdeen and Threadneedle, that adopt a strong team-based approach – if a manager leaves, it often makes little difference to the investment decisions or how the fund is run.
So what should investors do when the manager of their fund leaves? "You should only follow a fund manager to a different company if you have confidence that they will be able to replicate their performance elsewhere," suggests Connolly.
But remember that no manager is infallible. After Bolton retired from Special Situations, he launched Fidelity China Special Situations investment trust, which surprised his legion of fans by performing well below expectations (in 2011 alone, it lost 30% of its value). Who would have thought it?
Notable recent fund manager moves
- Anthony Bolton: 01/01/08 Fidelity Special Situations – retired (for the first time)
- Richard Buxton: 14/06/13 Schroder UK Alpha Plus to Old Mutual
- Graham French: 18/11/13 M&G Global Basics – retired
- Philip Gibbs: 01/09/13 Jupiter Absolute Return – retired
- Tony Nutt: 31/12//12 Jupiter Income – retired
- Nick Purves and Ian Lance: 18/05/10 Schroder Income to RWC Partners
- Sanjeev Shah: 31/12/13 Fidelity UK Special Situations – retired
- Neil Woodford: 29/04/14 Invesco Perpetual Income/High Income – to Oakley Capital
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