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Star fund manager or team player - which approach is best?
By Neal Underwood | Wed, 5th July 2017 - 11:11
The issue of how to replace departing fund managers has again come to the fore with the news that Schroder small-cap managers Paul Marriage and John Warren are leaving the firm to set up their own boutique business.
The pair will be taking management of one of their flagship funds - Schroder UK Dynamic Absolute Return - with them to their new venture Tellworth Investments LLP, while handing over the reins on their other fund, UK Dynamic Smaller Companies. Luke Biermann will take the helm of this £622 million fund following their departure, and will begin working with existing managers before they leave to ensure a smooth transition.
This raises the question of what fund management groups can do to mitigate the risk of fund managers leaving or retiring. One option is to put in place a succession plan, but this relies on the incumbent manager staying in the role long enough to facilitate a handover. And the incoming manager may not be as well equipped to manage the fund; his style may not be as effective or he may simply not be as good a fund manager.
Alternatively, some firms favour a team approach, where there is less key person risk if one member of the group were to suddenly up sticks and depart.
At First State Investments, Joanne Warner, head of resources, retires in August after 20 years at the company. She will be succeeded on First State Global Resources by Todd Warren, global resources portfolio manager, who has been with the team for more than a decade. He will share portfolio management responsibilities with Tal Lomnitzer, who joined the team in 2011. First State has had a plan in place for some time in anticipation of Warner's retirement, and the transition to the new manager should be relatively smooth as a result.
Another manager who has long had a succession plan in place is Nigel Thomas, who runs AXA UK Select Opportunities. Thomas is very much a star manager, with a long and glittering career, but the firm has a plan in place for Chris St John, who currently manages AXA Framlington UK Mid Cap, to replace Thomas when he finally goes. It remains to be seen whether St John is able to fill Thomas' considerable shoes.
Star managers are all well and good, and they can attract a lot of interest and assets when they are performing at the peak of their powers. But if they suddenly leave it can be hugely disruptive for both the fund management group and a fund's investors.
Take the case of Neil Woodford, who left Invesco Perpetual in 2014 to set up Woodford Investment Management. A lot of assets left Invesco and followed Woodford to his new firm, even though he was succeeded on the Invesco Perpetual Income fund by a more than capable manager in Mark Barnett.
Star managers always present a risk to asset managers as the qualities they bring to the table are often exactly those which make them irreplaceable. You can see from the charts below that assets under management in the Invesco fund fell dramatically after Woodford announced he was leaving, and have fallen steadily since. However, the fund's performance under Barnett has remained strong.
Georgina Hamilton and George Godber's surprise departure from Miton last year saw assets in their CF Miton UK Value Opportunities fund fall from a peak of £870 million at the end of March 2016 to just £293 million by November, an indication of just how much of an impact fund manager movements can have on portfolios.
Some fund management groups deliberately adopt a team approach. Fidelity, for example, does this very well, with co-managers supporting the lead manager and analysts actively contributing to the running of portfolios.
"We have a team-based approach where all our fund managers and analysts work together - helping us develop talent from within our organisation to maintain consistent outcomes for our customers", says Fidelity.
Despite this, though, portfolio managers are ultimately responsible for picking stocks on the basis that funds are managed more effectively when investment decisions are based on individual responsibility and accountability rather than made by committee.
Investors should bear in mind that if they choose to invest with a star manager there is always the risk that if that manager leaves it could have a potentially significant impact on their investments.
And, if a manager does leave, a decision needs to be taken on why they left and whether to follow them, remain in the fund with the new manager or switch funds entirely. Did you invest purely for that manager, or because of the fund's process? Is that process repeatable under the new incumbent?
Investing in a fund where more of a team approach is adopted, and where succession planning is built into the philosophy and process, dramatically reduces exposure to star manager risk.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.