For a long time, it seemed like Neil Woodford could do no wrong.
That was until 2017, when the UK’s best known fund manager seemed to lose his magic touch – and since then, the returns from his three popular funds have been struggling.
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.
AJ Bell’s 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 doesn’t suit the market conditions.
But perhaps this also suggests that investors shouldn’t rely so heavily on star stock-pickers to consistently deliver reliable returns. While there’s no doubt that these professionals are good at their jobs, they can’t work miracles.
Jonathan Miller at Morningstar UK reckons that the star manager concept is overplayed now. “In the past, there was probably more focus on key figureheads,” says the director of manager research. “But with a new generation of managers we’re meeting, there is definitely a sense of them working more closely with people in the team.”
While Miller acknowledges that the lead manager will still “pull the trigger” on decisions, they now tend to bring co-managers into the picture a lot more.
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).
We saw this when Woodford announced that he was leaving Invesco Perpetual to set up his own company in 2014, prompting Invesco’s High Income fund to suffer outflows of £8bn in total.
Richard Buxton is another example. Having announced his intention to leave Schroders in 2013 to join Old Mutual Global Investors (now called Merian), his previous fund – Schroder UK Alpha Plus – was hit with outflows of £1.8bn in just eight months.
And when George Godber and Georgina Hamilton announced that they were leaving Miton for Polar Capital in 2016, £500m exited the fund over the subsequent 12 months.
“A 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,” says Hughes.
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.
But we are now increasingly seeing asset management firms focus on succession planning, and Morningstar’s Miller points out that companies are trying to make sure that investors understand the co-manager’s role in the decision-making process. “This gives people more comfort, and lets the deputy become more important in the portfolio.”
For example, he points out that one of Fidelity’s 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.
“The 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,” says Hughes. “It is perhaps no surprise that the three big stars of UK fund management – Neil Woodford, Nick Train and Terry Smith – run their own businesses, and use their own image and success as a way of promoting their funds.”
Star managers aren’t just a headache for firms – they can also be expensive for the investors in terms of management fees, significantly eroding investment returns in the long run.
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 don’t always get what you pay for.
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 – meaning there is more scope for a good manager to outperform.
“Regulations such as Mifid II have caused a lot of sell-side firms to cut back on their research – particularly in the smallest parts of the market,” he says. This is again because markets have become less efficient, making it easier to find juicy stock-picking opportunities.
And yet, even if more managers are granted star status, it’s still important for investors to look at other factors, such as strategy, fees, and whether the manager invests in their own fund.
The bottom line is that investors shouldn’t let themselves be blinded by the sparkly reputations of the big stars.