2013 was the year when Neil Woodford and Richard Buxton announced their departures from Invesco Perpetual and Schroders respectively, and left an aftermath of outflows from their former funds. Both announcements made headlines across the asset management industry, as key figures questioned the impact the departures would have on the funds, stocks and firms attached.
With the full effects of Woodford’s departure still to be seen and Schroders’ only just recovering from Buxton’s departure, a key lesson is taking form. While investors should not be wary of putting their money with the stars of the asset management industry, firms would do well to think twice when hiring those with the so-called Midas touch.
‘Star’ fund managers are often those managers who, after years of experience within a certain asset or area, as well as consistently good performance, gain enough expertise and credibility that they gain a following. “These managers are high conviction managers,” says Adrian Lowcock, Senior Investment Manager at investment firm Hargreaves Lansdown. “The main reason they are star managers comes down to a mixture of experience and a track record to support it. They’ve stuck to their convictions despite what’s going on in the market and this has come out well for them.”
Aside from Woodford and Buxton, the asset management space has seen a slew of star fund managers, with names such as Anthony Bolton, Adrian Frost, Hugh Young, Roger Guy, Nigel Thomas, Mark Barnett, Alex Wright, Giles Hargreave and Harry Nimmo drawing in investors. All have distinguished themselves within a specific asset class, having generated returns that are often far beyond market averages.
Outperforming others
For instance, Anthony Bolton used a value/contrarian approach, which returned more than 14,000 percent to the investors of Fidelity Special Situations between 1979 and 2007, while Woodford managed $55.5bn in cash and saw Invesco Perpetual’s Income Fund rise by 1,723 percent from October 1990 to 2013. Similarly, Alex Wright launched the now soft-closed Fidelity UK Smaller Companies Fund in February 2008, which became the second best performer in global IMA, with returns of 252.02 percent. Their strong convictions and consistent performances are what draw investors in, especially in times of market uncertainty when solid returns are a key driver for investor money.
As such, it’s no surprise that Woodford had a market share of more than a third in UK equities, having backed businesses with strong cash flows, such as pharmaceuticals GlaxoSmithKline and AstraZeneca in recent years. Woodford’s returns have been well ahead of his peers and his funds have gained a growing following. Similarly, Buxton ran the $5.7bn Schroder UK Alpha Plus Fund, which delivered a 285 percent return over the past 10 years compared with the IMA All Companies sector average of 179 percent. With all that money under their belts, their announcements to leave Invesco and Schroders made serious waves in the investment industry.
“Woodford had been at Invesco for 25 years and was managing a lot of money, so when he said he was leaving, it came as a big surprise. It’s a move that matters to a lot of investors. Buxton had also been at Schroders for some time and his departure came completely out of the blue. He was a really successful fund manager there, so investors started asking whether he would continue to perform after he moved to Old Mutual,” said Lowcock.
Investor panic
The shock to the industry was only the immediate effect of the announcements. Since Woodford’s departure became public, the Invesco Perpetual Income Fund (see Fig. 1 and Fig. 2) has suffered. On January 29, it lost more than half a billion pounds in one day, shrinking the fund from nearly $15.3bn to around $14.3bn, according to data firm FE Analytics.
“This is clearly a big investor deciding to move their money and that’s not a good sign,” said Darius McDermott, Managing Director of Chelsea Financial Services. McDermott himself sold his holding in Woodford shortly after the announcement of his departure. “Neil is one of the most well-known, if not the most well-known, and best-performing managers over my 19 years in financial services. In this instance, I want Woodford,” McDermott told FE Trustnet when explaining why he was leaving the Invesco fund to follow Woodford to Oakley Capital.
Lowcock says that firms must prepare for the day that a fund manager leaves, and not hedge
their bets on one
manager exclusively
Similarly, Richard Buxton’s departure from Schroders sparked $3bn in outflows from his flagship UK Alpha Plus Fund, equalling half of the fund’s total assets since the announcement that he was quitting the firm in March 2013. In comparison, his new UK Alpha fund has attracted close to $1.6bn in 2013, helping to drive Old Mutual Wealth’s profits up 11 percent last year.
As such, Lowcock says that firms must prepare for the day that a fund manager leaves, and not hedge their bets on one manager exclusively. “As a company, you don’t want to put all your eggs in one basket. If you have a very successful fund manager, you don’t want to stop him either if the fund is attracting a lot of money – it’s a matter of having a portfolio of strong managers that can support and take over in the event that he does leave the firm.”
The risk of letting a fund manager control a majority of a firm’s assets is a tangible one. In 2010, fund management group Gartmore saw severe outflows following the departure of its star fund manager Roger Guy, which caused revenues to drop by more than 20 percent. The firm had put Guy in charge of $5.8bn of the group’s total assets, 17 percent of group’s total. Following Guy’s departure, the group was left so vulnerable that it was bought by Henderson in January 2011. Outflows of this magnitude primarily come down to investors pulling their cash out over concerns that the new fund managers won’t be able to live up to the star manager’s success. They can be tough acts to follow.
Next in line
Now, all eyes are on fund manager Mark Barnett, who is taking over from Neil Woodford at Invesco. Barnett currently manages five funds and trusts, of which at least one has outperformed Woodford’s income funds. When Barnett takes over in April 2014, he will manage a total of $41.5bn for savers and investors. But there can be issues when star fund managers take on a sum of this size, says Lowcock: “It can create some problems if a firm is giving a manager a lot of assets, as this can make it hard for the manager to continue their strong performance. There is always a risk of letting a fund get too big, making it impossible to run the fund in the way the manager did before,” he explained.
However, industry figures maintain that investors should not panic when a star fund manager leaves a fund or firm behind. Often, the firm in question will have an experienced team in place to take over the fund and emulate the previous investment style implemented by the star fund manager. And there’s no guarantee that your manager of choice will continue to bring in big bucks at his or her new fund.
“Many of those who have backed Woodford for years will want to follow him to his new outfit, and this could present challenges to the new manager, Mark Barnett,” said Rob Morgan of investment firm Charles Stanley. “Should a large number of investors move their money out, it will force Barnett into selling significant quantities of stock. However, this should still be a relatively orderly transition [for] a more than capable fund manager. Our view remains that Barnett’s patient long-term approach should continue to benefit investors across all his funds – so think carefully about who you want to manage your investment rather than stampede for the exit.”
What investors need to know
Lowcock emphasises that investors need to do their due diligence on a fund before investing or pulling out their money, and not follow star fund managers blindly. That said, they are still strong managers and should by no means be bypassed once leaving their flagship fund. It’s just a matter of investors doing their research and making a decision that works for them and the money invested.
“Investors need to take the size of a fund, what it’s investing in and what the style is, into account. Basically, what would drive performance at this fund? I would look at things like how many stock does this fund manager have. If he usually has 20-30 stocks, why does he all of a sudden have 80 and how will that affect performance? You want to look for consistency in their style and performance and check whether they’re drifting away from the core investment principles of the fund. Basically, has the manager changed and can he still deliver?” says Lowcock.
In this respect, investors shouldn’t be more or less wary of investing with star fund managers. The real consequences lie with the firms that must endure a certain level of outflows once star fund managers leave, just as they enjoy the inflow of money when bringing them in.
