{"id":105520,"date":"2018-12-14T02:43:26","date_gmt":"2018-12-14T02:43:26","guid":{"rendered":"https:\/\/www.bnreport.com\/why-investors-should-be-wary-of-star-managers-3\/"},"modified":"2018-12-14T02:43:26","modified_gmt":"2018-12-14T02:43:26","slug":"why-investors-should-be-wary-of-star-managers-3","status":"publish","type":"post","link":"https:\/\/www.bnreport.com\/en\/why-investors-should-be-wary-of-star-managers-3\/","title":{"rendered":"Why investors should be wary of star managers"},"content":{"rendered":"

For a long time, it seemed like Neil Woodford<\/a> could do no wrong.<\/p>\n

That was until 2017, when the UKs best known fund manager seemed to lose his magic touch \u2013 and since then, the returns from his three popular funds have been struggling.<\/p>\n

His flagship Woodford Equity Income fund has lost investors almost 10 per cent over three years, while the sector average has gained 15.5 per cent over the same period.<\/p>\n

AJ Bells head of fund selection, Ryan Hughes, points out that this serves as a stark reminder that even top-rated fund managers will go through periods when their investment style doesnt suit the market conditions.<\/p>\n

But perhaps this also suggests that investors shouldnt rely so heavily on star stock-pickers to consistently deliver reliable returns. While theres no doubt that these professionals are good at their jobs, they cant work miracles.<\/p>\n

Jonathan Miller at Morningstar UK reckons that the star manager concept is overplayed now. \u201cIn the past, there was probably more focus on key figureheads,\u201d says the director of manager research. \u201cBut with a new generation of managers were meeting, there is definitely a sense of them working more closely with people in the team.\u201d<\/p>\n

While Miller acknowledges that the lead manager will still \u201cpull the trigger\u201d on decisions, they now tend to bring co-managers into the picture a lot more.<\/p>\n

And yet, the concept of star managers remains, so much so that they pose massive problems when they leave asset management firms. More often than not, the funds that are left behind will suffer huge outflows as investors rush to move their money (usually to follow the star fund manager).<\/p>\n

We saw this when Woodford announced that he was leaving Invesco Perpetual to set up his own company in 2014, prompting Invescos High Income fund to suffer outflows of \u00a38bn in total.<\/p>\n

Richard Buxton is another example. Having announced his intention to leave Schroders<\/a> in 2013 to join Old Mutual<\/a> Global Investors (now called Merian), his previous fund \u2013 Schroder UK Alpha Plus \u2013 was hit with outflows of \u00a31.8bn in just eight months.<\/p>\n

And when George Godber and Georgina Hamilton announced that they were leaving Miton for Polar Capital in 2016, \u00a3500m exited the fund over the subsequent 12 months.<\/p>\n

\u201cA high-profile departure and subsequent outflows also make for a challenging period for the incoming manager, who has to manage constant sales, which makes reshaping the portfolio difficult,\u201d says Hughes.<\/p>\n

Part of the problem is that, when a fund manager moves on and a little-known deputy takes the reins, it creates a sense of panic among investors who have built up trust with the former lead manager.<\/p>\n

But we are now increasingly seeing asset management firms focus on succession planning, and Morningstars Miller points out that companies are trying to make sure that investors understand the co-managers role in the decision-making process. \u201cThis gives people more comfort, and lets the deputy become more important in the portfolio.\u201d<\/p>\n

For example, he points out that one of Fidelitys high-profile managers, Ian Spreadbury, is set to retire at the end of this year. The company made sure to bring in an experienced co-manager (Sajiv Vaid) several years prior, so that investors had an opportunity to gain trust in the new lead manager when he takes over.<\/p>\n

\u201cThe concept of the star fund manager remains, but the star is not shining quite so brightly these days, with fund groups more reluctant to build an individual into a star,\u201d says Hughes. \u201cIt is perhaps no surprise that the three big stars of UK fund management \u2013 Neil Woodford, Nick Train and Terry Smith \u2013 run their own businesses, and use their own image and success as a way of promoting their funds.\u201d<\/p>\n

Star managers arent just a headache for firms \u2013 they can also be expensive for the investors in terms of management fees, significantly eroding investment returns in the long run.<\/p>\n

And, of course, while these top investors will have experience, lesser-known managers will often have fresher ideas and might be more willing to try new things, so you dont always get what you pay for.<\/p>\n

With that said, there will still be a place for star managers. In fact, Darius McDermott from FundCalibre argues that there will actually be more star managers in the future, largely because of the rise of passive investments, which make the market less efficient \u2013 meaning there is more scope for a good manager to outperform.<\/p>\n

\u201cRegulations such as Mifid II have caused a lot of sell-side firms to cut back on their research \u2013 particularly in the smallest parts of the market,\u201d he says. This is again because markets have become less efficient, making it easier to find juicy stock-picking opportunities.<\/p>\n

And yet, even if more managers are granted star status, its still important for investors to look at other factors, such as strategy, fees, and whether the manager invests in their own fund.<\/p>\n

The bottom line is that investors shouldnt let themselves be blinded by the sparkly reputations of the big stars.<\/p>\n

<\/a><\/strong> <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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