Waiting for a star to fall?

12 July 2019

By John Husselbee, Co-Fund Manager HC Verbatim Portfolio Growth Funds

Star manager culture remains a divisive topic in the investment world, with recent criticism claiming hero worship of certain individuals has given them too much leeway and indulgence.

It can hardly be surprising that many parts of the investment industry – whether it is sales and marketing departments of asset managers, fund buyers or journalists – promote the concept of the star fund manager. Stars sell, after all. This is the case for sport, films, TV, music and books.

Yes, these examples all relate to different strands of the entertainment industry but it also applies to fund management. You only have to consider the recent news that 'Big Short' investor Steve Eisman is launching funds into the UK market, bringing a little film star glamour to the industry – albeit by proxy. Interestingly, other professional industries such as banking or the law also feature high-profile individuals but I would suggest there is nothing like such a wide-ranging star culture, apart from, perhaps, when it comes to FTSE 100 CEOs

There may be something in the fact that fund management is a crowded and competitive space so groups need to find ways to mark themselves out from peers more than in other industries: creating a star culture is one way of doing this. I would also suggest there is more of a long-term ‘personal’ element to investing than banking for example: after all, people are entrusting these individuals with growing their wealth so they want to be able to point to an individual or team responsible for this.

It is also because there is some truth in the concept of the star manager. Recent research from Willis Owen suggested that certain fund managers do make a genuine difference, with performance often dropping off after their departure. The group looked at 15 funds where a star manager left between 2013 and 2017 and found the level of outperformance dropped dramatically, with annualised returns against relative benchmarks falling from 3.6% to 0.4% once new managers took over.

What investors should understand however is that fund managers are like the rest of us, subject to job moves, illness and, eventually, retirement. But as people become so invested – literally and figuratively – in an individual, this means it can be highly disruptive when a manager changes job or retires. There are also instances when selling a fund when a manager leaves is ultimately the right call for investors.

The key is not to generalise about the impact and prowess of individual fund managers and teams. Given the work many groups are now putting into succession planning – particularly for managers who have been in place for many years – it is important to take time over these decisions and not immediately rush for the exit.

We have been through exactly such a situation in recent months, with Nigel Thomas announcing a long pathway into retirement back in 2018 and passing his flagship AXA UK Select Opportunities Fund to his deputy Chris St John at the start of this year. After a long review, we have decided to remain with St John and the Fund.

We also hold Alexander Darwall’s Jupiter European Fund and will go through the same exacting process in reviewing this position. Rather than passing on to another team member, Jupiter has chosen to recruit a successor from outside, in the shape of Threadneedle’s Mark Nichols, and we will be considering his attributes – plus having a look at our European substitutes bench – over the coming months.

Ultimately, we buy funds to fulfil a specific role in our portfolios so the core of the work when a manager leaves is to establish whether the successor will offer a similar investing experience; if not, we will likely make a switch.

Taking a wider view, we always put suitability, transparency and value for money at the heart of any investment decision, and in the AXA example, we were confident the change in manager met these tests. We are comfortable in the knowledge the fund will continue to be run in the same way – the group has stressed the usual evolution not revolution line and the process and philosophy remain intact – with St John given the opportunity to stamp his mark on this flagship UK equity vehicle.

In terms of transparency, we have been impressed with AXA’s communication around Thomas’ retirement, announcing the news in April 2018 and allowing a long handover. St John has been at the helm of Select Opportunities since 1 January and over the course of the last year, we have had all the access to the team we wanted.

Moreover, St John was named deputy on the Fund more than five years ago and it has always been clear he would take over when Thomas chose to retire – further transparency from AXA in its attempts to ensure no surprises.  Such a long lead time means we believe the investors who were going to sell have done so. Few growth managers with a small and mid-cap bent will complain about having less money to run and, as stated, the long notice period should mean St John is not facing a volatile assets under management situation in his early days at the helm.

The final endorsement comes from Thomas himself, who has confirmed he will continue to hold 70% of his own pension in the Fund, making him the largest private individual holder and emphasising his trust in the new leadership.

Ultimately, our view on the star manager question is that it depends on the individuals in question but, as stated, we will run any decision through our suitability, transparency and value for money prism. Many star managers have generated great returns for investors over the years but it is vital not to fall in love with individuals and remember they are simply stewards of capital. For our part, we would say outsourcing fund analysis and selection to professionals is one way of achieving that.

The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.