Top performers

However, in reality, I suspect the flurry of job-related activity in January more reflects the recent bonus season and the greater ease of movement when potential bonuses do not need to be ‘bought out’ by new employers. Either way, however, it seems an appropriate moment to think about how we, as investors, should view both movements in senior company management, and also movements in fund managers.

I have questioned before whether a good chief executive makes a good company, and while I do believe that superior management is one of the facets that makes a ‘quality’ business, it does not necessarily follow that a change to less good – or unproven – management at a company will, per se, be detrimental to a company’s fortunes, nor that bringing in ‘good’ management will act as a panacea. And so, perhaps, the market’s reactions to changes in chief executives – which can often be quite dramatic – are more buying opportunities for the smart investor, than a reason to make fundamental changes to his or her investment thesis.

But what of fund managers? How should we view their moves, both as investors in the funds they are leaving behind, and as potential (or existing) investors in funds they are given in their new job? And if the average fund manager tenure really is as short as the often-quoted three years, this becomes a very important question. Since I manage a team of fund manager selectors, who spend their days researching managers and reacting to such moves, it is also a question close to my heart.

The answer, unsurprisingly, lies in the detail. It is understanding how a fund manager handles his portfolio, and what resources they rely on in their current role, that enables us to understand what the likely impact of their departure is on their current and future funds under management. For example, consider a fund manager whose process is broadly analyst-driven, and where the portfolio management is an amalgamator of ideas but not an idea generator. What value do they add? As I have written before, a good portfolio manager is an architect and not a builder, but when fed with enough good ideas, any portfolio manager has the potential to deliver adequate performance as a builder, at least during a three-year period when luck could be on their side.

In this case, a portfolio management departure could actually be positive for investors in the existing fund, as the core alpha generating engine of analysts remains, and the replacement portfolio manager could actually add more value than the incumbent. Conversely, often buoyed by his or her success, and not understanding the value – or lack thereof – of their own contribution, this portfolio manager might be moving to a boutique, unsupported by analysts, in the belief that the track record can be replicated but that the (financial) gains need not be shared with an analyst team. And so the manager moves in the mistaken belief that they can continue to replicate their previous success and manage money independently. All too often this is a disaster.

Conversely there are many managers, with or without large analyst teams, who operate independently and act therefore as both idea generators and architects. Identifying them is not necessarily straightforward – I can list several with large analyst teams who in their marketing material make a good deal of their value add. However closer investigation, including talking with the portfolio manager and analysts, reveals that analyst contribution is limited and that the portfolio management is effectively autonomous. In this case the portfolio manager’s departure can be a substantial negative for the existing fund. However at their new firm, whether or not it offers an analyst team, they have a good probability of being able to replicate their past performance. And if they have moved from an analyst team of lesser quality (or no analyst team) to a company with a good analyst team, their potential for good performance is increased even further – meaning following them to their new firm is, for the investor, a good idea.

There are many managers, with or without large analyst teams, who operate independently and act therefore as both idea generators and architects.

I might often conclude with this point, but research does matter. Understanding how a portfolio manager adds value – and indeed whether they are their portfolio’s key source of performance – is imperative to assessing key man risk. While they might be a good marketing engine, they may or may not be critical to generating good performance for their investors. Assessing this internally is important for understanding effective compensation for portfolio managers versus analysts, but for external companies looking to poach talent it is essential. Bringing in a portfolio manager with past success but who then underperforms is all too common, and it is only by understanding their strengths, their current value add and other contributors to this that they can be effectively assessed. Caveat emptor, particularly when buying in talent.

James Bateman, Head of Multi Manager & Multi Asset Portfolio Management