Over recent years the focus on investment research and fund selection for IFAs when advising on portfolio planning for clients has heightened in intensity and importance.
For investment advisers, asset allocation is the key determinant for the success of any portfolio. The fund manager decides where to invest, and their skill and judgement is what advisory business model IFAs rely upon to deliver the required returns to their clients.
Any robust and in-depth research process should identify the funds and the managers who offer potential to deliver returns to the investor.
A number of factors must be considered when selecting funds, and the ranking of importance of fund management changes, and the impact that they have on fund performance and returns, is part of the overall process. But how important are they?
On this topic, two valuable research documents conducted by the Faculty of Finance at the Cass Business School and Centre for Asset Management entitled Changing Horses in Midstream and The Impact of Fund Manager Changes on Fund Performance contain a wealth of empirical research. The papers draw some very significant conclusions, which are well summarised:
“Manager change does have an impact upon the performance of the fund. Funds that perform well perform less well once the manager changes, while funds that perform poorly tend to perform better or at least less poorly after the manager change.
“Our research adds weight to the idea that fund managers matter. Our results should also serve as a warning to investors: when the fund manager changes expect performance to change too.”
The fund manager, then, has a significant impact, negative or positive, when he either retires, moves company or at worst, dies. The papers examine a number of key areas, including: risk aversion; investment styles; developed markets versus emerging markets; active and passive strategies and fund manager tenure.
The papers also highlight the fact that more data is available for US fund management than in the UK. The conclusions drawn, however, I believe do have strong relevance for the UK retail market, and should be seriously considered.
When a ‘star’ manager changes team colours and leaves behind a fund he has been managing extremely well, advisers have to ask themselves: ‘Do I stay or do I go?’
I am often surprised in conversation with colleagues to hear their varying responses to fund manager changes. The reactions broadly fall into two camps; the first believing that the manager is the maestro and will move client funds to follow the star, while the second group takes a more pragmatic view, keeping faith with the fund as well as the management team and process that have been successfully built up by the outgoing lead manager.
My own view has always been that there is danger in putting too much store on one individual fund manager, and that the other criteria for selecting a fund are equally important deciding factors.
Conclusion
Overall, the ability and skill of a fund manager is of course of great importance, but advisers need to keep an objective view on things when changes in personnel take place. It is far too easy to follow a fund manager because he has always out-performed his rivals, but the decision to move client portfolios away to pastures new in pursuit of a star manager may not necessarily be the right one for business, and should be approached with one’s business head on, and access to the findings of top-quality research.
Nick McBreen is IFA at Worldwide Financial Planning
It is worth looking at some recent examples of fund management changes and the resulting changes on fund performances:
Neil Woodford > Mark Barnett, Invesco
A good example is the Invesco Perpetual Income fund, in which, prior to his much-heralded departure, Neil Woodford had set the bar very high in performance and returns for the fund, and displayed a remarkable skill in reading the market and taking smart positions. Since March 2014, when Mark Barnett took over the reins of managing the fund, some good progress has been achieved in relation to the UK All Companies sector and competitor funds. The mandate of generating a sustainable and reliable income stream from any fund is no simple job, but it would appear that the decision to stick with Mark Barnett rather than following Neil Woodford is starting to look a wise one.
Graham French > Randeep Somel, M&G
Graham French was indeed a star turn at M&G managed growth. Anyone trying to fill his shoes needed to be an extraordinary manager. Of course, the ability of anybody to deliver returns in the flexible sector needs to be of the top order, and Somel has a hard act to follow. Randeep Somel has been given the mantle, and with only a year in charge of this mainstream flagship fund, in the short term he may still be firing at less than full potential. He does however have an in-depth and very sound background as an analyst, and should be given the benefit of the doubt.
Philip Gibbs > James Clunie, Jupiter
The Absolute Return sector has very slowly made some upside over the past five years but the Jupiter Absolute Return fund has been lacklustre to say the least. This may well be put down to the gradual winding down of star manager Philip Gibbs, leading up to his ‘retirement’. The new incumbent James Clunie can only go one way with this fund and that has to be upward. Compared with others in the sector, Mr Clunie has a mammoth task to make up the slack in performance, and the early indicators are that little progress is being made.
Richard Buxton > Philip Matthews, Schroder
Looking at the short-term performance on the Schroder UK Alpha Plus fund one might take some comfort as Philip Matthews rounds off his first year having replaced such a heavyweight manager as Richard Buxton. The UK All Companies sector is a vibrant area for investment, and Mr Matthews certainly has a very strong fund to take forward and apply his own approach to continuing the fund’s success story.
This I believe is another example of looking at the fundamental qualities of the fund and not taking a knee-jerk reaction and following the previous manager – even one as supremely capable and successful as Mr Buxton.
Key points
Asset allocation is without doubt the key determinant for the success of any portfolio.
The fund manager has a significant impact, negative or positive, when they either retire, move companies or die.
Advisers need to keep an objective view on things when personnel changes take place.
