Should you judge a fund by its manager?

Published by Rob Griffin on 13 May 2008.
Last updated on 23 August 2011

Deciding where to invest your hard-earned cash is notoriously difficult. Pick the right funds and you can look forward to bumper returns - but make the wrong choice and your savings could be wiped out within months.

So how can you improve your chances of success? A lot of attention is focused on the managers of the funds these days, but is it really wise to put your faith in highly regarded individuals - or should you concentrate on other factors instead?

Rebecca O’Keeffe, head of fund management at Interactive Investor, believes the person at the helm is the most vital cog in the investment machine. Take them away, she says, and you could be left with nothing.

"The fund manager is more likely to be the key to the success of a fund than the management group, so I prefer to follow names rather than houses," she says. "That’s why I put as much - if not more - emphasis on the manager than the fund."

Picking a fund manager with a long track record of making money in a variety of market conditions obviously makes sense. Past performance may be no guarantee of future success, but it can indicate whether they are capable of delivering the goods.

Knowledge of different economic environments and plenty of stock picking experience are the principle benefits of having a wise old sage looking after your money, because it means they are less likely to lose money.

The problem is that these individuals are in very short supply. So many have moved jobs within the last couple of years that it can be very difficult to draw any meaningful conclusions about the performance of individual funds.

An analysis of the fund management world illustrates the point. Only 14 managers have run the same portfolio for more than 15 years, while just four remain in place having celebrated their 20th anniversaries in charge. These are Andrew Green and Gordon Grender – both of GAM - Christopher Reilly at Bank of Ireland and David Marchant of Halifax.

This is backed up by research from New Star, which revealed that eight in 10 managers had been running their current funds for less than two years. Almost a third, meanwhile, had been at the helm for under 12 months.

Fighting for the best names

The cult of the star fund manager must share part of the blame for this situation. Fund groups have been so desperate to attract – and keep – the best performers in a variety of asset classes that they have happily lavished attention on their new charges.

In theory this is a great idea. Hire a superstar manager with an enviable track record and watch the money pour in as investors are seduced by the prospect of bumper absolute returns.

But what happens if the manager decides to leave? For those groups that have spent thousands of pounds and countless hours promoting the new arrivals, it can mean red faces all round, not to mention a potentially dramatic drop in performance.

The most vivid example in recent times was Neil Pegrum. Less than 18 months after joining Insight Investment to launch the UK Dynamic fund and making it the top performing fund, he stunned the industry by moving to rival Cazenove.

The UK Dynamic fund delivered a bid-to-bid return of 79.96%, compared to the 27.22% average for the UK All Companies sector, between its launch in January 2003 and 1 April 2004 – a few weeks before his departure, according to Morningstar.

The renowned stock picker, who made his name as a UK equity manager with M&G, was such a success – and viewed as so irreplaceable - that Insight actually decided to close the fund rather than risk passing the mandate onto someone else.

One of the most shocking examples of performance crumbling before investors’ eyes was the special situations fund from Solus. Under the leadership of Nigel Thomas it became one of the high-flying offerings of the late 1990s.

From January 1996 until he relinquished control in February 2001, the fund delivered an astonishing bid-to-bid return of 355.07%, compared to the 96.99% average, according to Standard & Poor’s. This made it the top performer out of 148 rivals in the UK All Companies sector.

However, the two years following his departure were abysmal. A miserable bid-to-bid return of -57.55% was delivered between March 5th 2001 and March 3rd 2003, compared to the sector average of -36.22% meant the fund sunk to 232nd out of 234 peers.

Successors can succeed

But this doesn’t always have to be the case, insists Rebecca O’Keeffe. Some transfers of power can be completed very smoothly with the performance figures remaining constant or even improving.

"A classic example of a fund manager being followed correctly is Chris Rice, manager of the Cazenove European fund," she adds. "Since joining from HSBC he has produced top quartile performance each year since inception in 2003."

Elsewhere, the Newton Higher Income fund hasn’t suffered despite losing two respected names in Toby Thompson and Clive Beagles with the past decade - a fact attributed to Newton’s house style and its strict buy and sell discipline.

Under Thompson the fund was ranked 5th out of 60 funds between the start of 1997 and the beginning of July 2001, according to Standard & Poor’s. Over this period it delivered a bid-to-bid return of 97.05% compared to the 62.77% average for the UK Equity Income sector.

His successor, Beagles, enjoyed similar success. By the end of his reign at the end of March 2004, the fund was ranked 7th out of 66 funds after delivering a bid-to-bid return of 7.86%, against the -3.37% sector average.

But even when it goes wrong, the manager can’t always be blamed for a period of poor performance, points out Andy Merricks, head of investments at Brighton-based financial adviser Skerritt Consultants. Even the most respected names will suffer dips. "Fund managers are very important and I set a lot of store by them, but they can’t work miracles and it’s important to remember that fact," he says. "The sectors and asset allocation elements are also of primary importance."

He cites John Wood, the respected manager of the Jo Hambros Capital Management UK Opportunities fund as a prime example of a capable individual who is stuck in a no-win situation at the moment. "He is very good but is managing a basket of UK stocks which is bound to go down in this market," he says. "He may be able to reduce the losses by investing in defensive stocks but he can’t make it rise. He’s not Paul Daniels."

Longevity to legendary status

Perhaps the most pertinent example is the experience of Neil Woodford, who is one of only a handful of managers that has run his portfolios – Invesco Perpetual Income and High Income – for more than 15 years.

Many advisers turned their backs on him when he shunned the ill-fated boom, but his stance was eventually vindicated. He is now regarded as one of the few remaining legendary names in the investment world.

Over the past five years, for example, both funds have delivered a return of more than 144% - well ahead of the 93.5% average for the UK Equity Income sector, according to Morningstar figures to 10 March 10 2008.

Another possible reason for bouts of under performance is an increased amount of responsibility placed on the fund manager’s shoulders, suggests Andy Gadd, head of research at the Lighthouse Group.

"To retain the services of "star" managers, large fund management groups invariably offer them management positions alongside their fund management role," he explains. "However, this can be detrimental to their performance and is one of the reasons why we have seen the growth of boutique investment houses in recent years."

The high number of fund manager changes during an average year means you need to review your funds on a regular basis, adds O’Keeffe, and understand the reasons behind the move and the impact it will have on the portfolio.

Don't jump too soon

"When a fund manager goes, it’s not an automatic reason to sell the fund as the replacement may be extremely capable," she says. "The largest fund groups will try and replace one star with another so it can be worth waiting to see what happens."

Another reason for holding on is that a star manager often gets parachuted into an under-performing fund – and this can take a good six months to sort out.

"There are usually quite dramatic changes in this period to the stocks, sectors and regions," says O’Keeffe. "This trading can affect the short term performance but hopefully the out-performance can start again when the changes have been made."

As well as having experience of picking stocks and managing through different economic environments, it also pays to work within an investment house that has an established philosophy as Newton has proved.

Even the star fund managers acknowledge the importance of having a decent team around them. Mark Lyttleton, whose responsibilities include running the BlackRock Merrill Lynch UK Absolute Alpha fund, insists this is a vital part of the equation.

"Having people around me with which I can bat ideas around with is very helpful and also helps me to carry out the screening process," he says. "There are more companies in the marketplace than I can get to see on a regular basis."
The ability to tap into expert knowledge is also advantageous. Being able to call upon specialists in natural resources with backgrounds in geology, for example, increases the likelihood of spotting an interesting investment opportunity in this area.

"We’re lucky enough to have global teams who can help me understand what is going on in these markets," agrees Lyttleton. "Having one of our credit guys accompany us to meetings with companies that have a lot debt has been a massive advantage over the past six months."

So, it seems that the fund manager probably is the most important factor – but even the best will be unable to deliver consistently high returns without a decent support network behind them.

This means that research is vital in choosing your fund and manager. "You need to know whether the past performance is due to the individual or whether it is a team driven approach," adds Gadd. "Although a fund may have a 'named' manager, they are likely to have support which they will lose if they move to another company."

John Chatfeild-Roberts, author of Fundology - The secrets of successful fund investing, and head of Jupiter’s award-winning fund of funds team, has years of experience in picking fund managers to populate his products.

He suggests there are a number of key qualities, such as experience and an aptitude for hard work that most top fund managers possess – and these give them a competitive advantage over their rivals.

"Other important factors are an ability to think laterally and having a competitive streak, while being contrarian can also be an advantage," he says. "The way you can make money is by spotting things that others are yet to recognise."

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