InvestmentsNov 25 2013

News analysis: The rise of manager succession planning

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This year so far has seen a number of high-profile manager resignations and departures, and the differing investor reaction to each one highlights the growing need in the fund management industry to have a form of succession planning in place for key managers.

Last week saw Graham French (pictured right), manager of the £4.3bn M&G Global Basics fund, announce that he will hand his fund over with immediate effect to Randeep Somel, but will remain at the group in an advisory role for six months before retiring in May next year.

M&G has planned extensively for manager succession, with Mr Somel having been a deputy manager on the fund since 2010, and he and Mr French will be working hard to keep clients happy during the next six months.

The same was not true during Richard Buxton’s shock departure from Schroders, when the lack of a successor in place was undoubtedly a contributing factor in his UK Alpha Plus fund more than halving in size as investors scrambled to the exit.

In contrast, Euan Munro’s departure from the hot-selling Standard Life Global Absolute Return Strategies (Gars) franchise had much less impact due to the team nature of the management and the ready replacement of Guy Stern.

Invesco Perpetual had been lining up Mark Barnett as the successor to Neil Woodford, and the clear succession plan may be one reason why outflows from Mr Woodford’s funds are at the lower end of Invesco’s expectations, it claims.

It is no surprise, then, to see in recent months a number of fund groups line up young deputy managers or co-managers on key funds, in an attempt to keep outflows from the funds to a minimum in the event that the star manager leaves.

In August, Axa Framlington announced a raft of deputy manager appointments across its UK equity funds, but the most interesting one was Chris St John taking on the role of deputy manager behind Nigel Thomas on the Axa Framlington UK Select Opportunities fund.

Mr St John is currently cutting his teeth on the Axa Framlington UK Mid Cap fund, with extraordinary performance so far but, while he is reportedly happy just to be running that fund right now, there is no doubt in the industry that he is being groomed to replace Mr Thomas, who will obviously want to bring his long and distinguished career to a close at some point.

While Axa has taken the step of succession planning by making the potential replacement a deputy manager, First State Investments has gone one step further in recently naming Tom Prew as co-manager with Jonathan Asante on its Global Emerging Market Leaders fund.

First State managing director Stuart Paul acknowledged the firm had always considered succession planning, which is why it has installed Mr Prew as co-manager alongside Mr Asante and Alistair Thompson – who has long been viewed as the successor to Angus Tulloch – on that manager’s Asia Pacific funds.

Succession planning is nothing new, though. M&G has long had deputy managers across its key funds, while Adrian Gosden, who has long been considered Adrian Frost’s successor at Artemis, has been co-managing the Artemis Income fund for more than a decade.

But Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said the problem of key man risk had grown in recent years due to the increased concentration of assets in top-performing funds, which has made succession planning even more important than before.

Gill Hutchison, head of investment research at City Financial and former head of investment consultancy at OBSR, agreed the need for groups to discuss succession planning was paramount.

Ms Hutchison has just launched Adviser Centre with former OBSR director Peter Toogood at City Financial, a web-based service that will include a ‘Positive Watch’ list, which will, among other things, comment on younger investment talent.

“There are a few examples where we want to work with fund managers to find out who these people are,” she said.

“We will aim to look at the successors, highlight the funds they are running now and have views on them. Succession planning is becoming a burgeoning problem.”

Paul Surguy, head of managed funds at Sanlam Private Investments, said having a named manager in place behind the key managers was “good business practice”.

But he said he was more concerned with how much time the overall team had spent together and preferred funds that had more of a team approach rather than one key manager.

He cited Gars as an example of a strategy that had lost several managers in recent years but that had not impacted on the fund due to its team approach.

He said First State had handled its succession process very well by introducing new members of the team over a very long time period. “You cannot just put a deputy manager in place six months before the manager leaves, they need to have been part of the team for some time,” he said.

Fund managers are becoming more and more aware of this problem, as none of the retail open-ended funds with assets of more than £4bn are run by only one manager without a deputy.

While having a succession plan in place could benefit fund management firms by stemming potential outflows from their funds, it can also benefit investors in the funds by ensuring that the replacement for the outgoing manager is ready straight away to assume control of a fund’s assets, which could prevent too much slipping of performance or radical changes of style.

As the saga around Mr Barnett and Mr Woodford highlights, though, it does not matter how long a firm has been planning succession, key managers have built up their asset base for a reason and, when they leave so will investors.

But more and more firms are realising that a coherent and long-term succession plan could result in smaller outflows and, hopefully, more consistent performance for investors.