Catch a falling star

Written by: David Craik Posted: 15/01/2018

StarFM illoOnce feted as the crème de la crème of the investment world, star fund managers have fallen out of favour of late. But they’re not likely to vanish altogether and are still worth watching

Over the Past couple of decades, the often-grey investment industry has been brightened up by the presence of movie action heroes and legendary football bosses.

Well, that might be overdoing it slightly. But through those years, star fund managers such as Templeton’s Mark Mobius, once described as the ‘Indiana Jones of emerging markets’; Anthony Bolton of Fidelity, aka the ‘Quiet Assassin’; and Invesco Perpetual’s Neil Woodford, the ‘Sir Alex Ferguson of investing’, have created a formidable reputation for success and won the trust of scores of retail investors.

As manager of the Fidelity Special Situations fund, Bolton, in the 28 years to 2007, achieved annual returns of nearly 19.5 per cent. And Woodford, who left Invesco Perpetual in 2014 after 25 years, oversaw about £25bn worth of savers’ money in his Income and High Income Funds, which alone notched up year-on-year returns of over 13 per cent. 

When Woodford launched his CF Woodford Equity Income Fund later in 2014, investors followed in huge numbers, attracting an initial £1.6bn. The fund has notched up a 30 per cent return since its launch, which beats the FTSE All-Share Index at 28 per cent.

Performance report

According to a report from Hargreaves Lansdown in early 2017, it wasn’t only Woodford’s star that was shining. The report looked at the performance of equity income fund managers over the period between 2006 and 2016.

It found that investing in Francis Brooke of the Trojan Income Fund would have seen £10,000 grow to £23,000. Thomas Moore of Standard Life Investments wasn’t far behind, with growth to £22,000. At the time, Hargreaves Lansdown described the men as ‘very good custodians of your money’. 

So, is this ‘article over’? All move on? Everyone seek out a star to follow? Not quite. There’s increasing evidence that the star manager’s shine is beginning to dim.

Bolton is a prime example. He launched a Fidelity Chinese Special Solutions Fund in 2010, which, three years later, was 14 per cent down on launch price. He announced his retirement and managed to recoup the losses before his departure. The fund has gone from strength to strength since.

Let’s also look more closely at the Woodford Equity fund performance. In the year to end of November 2017, it posted a 1.59 per cent return compared with the FTSE All-Share Index at 9.76 per cent growth.

In the latter three months of that period, it was down three per cent compared with the 2.84 per cent rise in the FTSE All-Share. The fund has been hit by the poor performance of holdings such as drugs firm AstraZeneca and the AA. 

In October last year, it was reported that asset manager Jupiter had withdrawn £300 million from the fund.

Mixed views

Annabel Brodie-Smith, Communications Director at the Association of Investment Companies, is unconvinced, however, that this signals the end of the starlight. “We’ve seen some managers have a tough time recently, but the star concept still carries a lot of weight,” she says. 

“A lot of retail investors, financial advisers and wealth managers still feel more comfortable investing in a fund where one main person has a strong and long track record in bull and bear markets. If we do emerge into a more volatile equity period, we’ll see investors looking to active fund managers to earn their stripes and pick the stocks that will perform well.”

One financial adviser who doesn’t agree is Patrick Connolly from Chase de Vere. “The investment industry tries to sell funds, and the star manager is a marketing gimmick,” he says.

“Yes, some managers have performed consistently well, but there are very few now you could call a star. Many have disappeared or their performance has suffered. We tell investors: don’t believe the hype.”

Connolly says he seeks out funds that have a deep support team of managers and analysts. “We look at fund consistency, risk management and capital allocation. We want to know that the fund will continue to do well even if the main manager gets up and leaves. We want to understand the process and the risks they’re undertaking, so there are no nasty surprises in the future,” he explains.

He also believes that the increase in demand for exchange traded funds (ETFs) and passive investing in recent years has put pressure on the concept of an active star manager. 

“There’s a perception that the value for money you get from an active manager compared with a passive option isn’t as much as first thought,” he states. “This is despite more price competition and the need for greater transparency driving active management fees down.”

Jason Hollands, Managing Director of investment management group Tilney, picks up on Connolly’s points. He says that following the Retail Distribution Review, which was aimed at creating more investment transparency, FAs have started to use more discretionary fund managers and multi-asset fund-of-fund propositions.

“Financial advisers are no longer so driven by star names. They’re increasingly referring their clients to investment managers and advisers like us,” he explains. “We have full-time analysts and undertake a more thorough approach to finding funds. As such, we look more at risk controls and methodology than individual managers outperforming for a period of time. The industry has shifted. It’s not just based on one manager’s reputation, but a deep understanding of fund process and strategy.”

Star managers have also lost the trust of investors, argues Thomas McMahon, Senior Analyst at FE. “The increased access to online investment data has chipped away at the lure of star managers for many years. Retail investors aren’t in thrall to the top managers as they once were,” he says. 

“Since the financial crisis, investors have also seen fund managers make the wrong calls or give the wrong opinions on the state of the economy. They bet against a recovery and came a cropper. There’s now a greater recognition that the ability to forecast multi-markets isn’t within an ordinary human being’s capability.”

Robo trends

So, does this mean investors should simply latch on to the recent growth in robo-advisers? Perhaps not.

Jonathan Miller, Director, Manager Research Ratings UK at Morningstar, believes the majority of these are focused on passive funds to keep costs low. 

“There’s a good user experience, but at present it’s more ‘tech’ than ‘fin’. You could buy a similarly priced multi-asset fund from an investment platform. This could advance with machine learning in the future, but not yet,” he states.

Instead, McMahon, like Connolly and Hollands, sees more emphasis from investors being placed on a fund’s management team, rather than a sole leader. This is despite Trustnet producing its own fund manager performance league tables. “We look at the performance of the manager against a benchmark of their peers, including in falling and rising markets and their track records,” McMahon explains. 

“We have noticed, though, when compiling our research, that fund groups are increasingly keen to show that the manager has able deputies and a succession plan in place. This is linked to greater scepticism of the star manager idea.”

McMahon also mentions more of a scientific and strategic approach to selecting the best funds. “We don’t try and pick managers who outperform one year, because they may not do it the next. We look at what their focus is – M&A opportunities or stable defensive stocks,” he says. “We understand when it’s going to do well and when it isn’t. 

“When you look at Woodford, he’s a fund manager who has a certain strategy that some years underperforms and in others outperforms. Look at past markets and his valuations and fundamentals. His fund could rally again in different market conditions in, say, six months’ time.”

It seems the lure of the star manager hasn’t quite gone away. “There’s still space for the big characters, the managers who attract a devoted crowd because of past performance and airing their views on a range of issues,” Hollands says. “But consider how much of their success is because of the support behind the scenes – the research analysts and colleagues who challenge them and the strength and consistency of the fund strategy.” 

What to look for in a fund manager

• Look at the manager’s performance data, and benchmark against peers. What are their top holdings in the fund portfolio? Is their experience relevant to those companies/sectors Why have they outperformed – has a particular market suited their style?
• What’s their approach to risk management? What’s made them sell a stock in the past and how do they react during difficult times? Do they invest outside of the core strategy or prefer to stay consistent?
• Look at the team behind them. How deep and experienced is it? If the main manager leaves, how badly will the fund be affected?
• Talk to the fund manager – they should be upfront and tell you when their strategy is likely to outperform or underperform.


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