Should you follow a fund manager to their next company?

But that prompts the question as to whether an investor should move their money when a fund manager departs. 

There have been high-profile examples in either direction in recent years, with investors following Neil Woodford from Invesco to his new shop, and Alexander Darwall taking billions of capital from Jupiter to his new venture, Devon Equity Management.

Conversely, when Mark Barnett quit Invesco and subsequently resurfaced at Telworth, he managed to raise a rather meagre £20mn in his first year. 

Tony Lawrence, who runs the model portfolio service at 7IM, says the key to understanding whether to follow a manager to another company is first to understand why one invested in the first place.

He says: “For example, if we had invested on the basis of the strength of the analysts, or the culture of the firm, or the strength of the systems, etc, we would want to understand the differences at the new outfit. We may already have a view on the culture of the rival that would give us pause.

“What are the motivations for the move? Is it because things were not as rosy at the previous shop, or more driven by money? Stepping back, we are unlikely to invest in the unique appeal of any one individual in the first place. We generally don’t subscribe to the notion of ‘star managers’."

Team-focused approach

Many asset manager have striven to move away from the star fund manager concept and instead try to create a team-focused approach.

But Lawrence’s view is that most funds are really run on a team basis anyway, and so he is wary of just the named manager leaving. 

But he says: “Where we would take a more positive view would be whereby a whole team moves. If we can build comfort that all the other trimmings would be equivalent, so systems, culture, support, we would be much more likely to follow.”

Lawrence says even in that scenario he would want to see a lower fund management charge in exchange for supporting a new fund. 

Stepping back, we are unlikely to invest in the unique appeal of any one individual in the first place. We generally don’t subscribe to the notion of ‘star managers’Tony Lawrence, 7IM

Fairview investment consultant Ben Yearsley says: “It is very hard to get a new fund away right now. For a lot of the big buyers, a fund has to be at least £100mn in size before they will invest, and have at least a three-year track record.

“So, if I am going to invest in a new fund, even if the manager was established at a previous firm, then I would want them to be offering a cheap price.”

Mathieu Caquineau, director of fund manager research for Emea at Morningstar, has conducted extensive research on this question, examining all instances where a manager switched to a rival company in the US and Europe over the past 30 years.

He concludes that managers tend to perform very strongly immediately after joining their new company, partly because they will be managing less money, at least initially at their new firm than they were previously, and this aids performance, coupled with the fact that a high-profile new hire is likely to get a lot of analyst support and other resource immediately after joining a new company. 

He feels this extra outperformance wanes over time in most cases, saying: “It is likely that they are still surfing on the successful investment style that led them to be hired in the first place. They are also benefiting from managing less money in the first years at their new house, making it easier to outperform.

“But investors should be doubtful that past success can be easily replicated in the long term. We find that portfolio managers tend to produce less alpha at their new firm when looking at longer periods, compared with what they achieved at their former employer.

“Still, investors seem to get a better outcome than sticking with the old fund. On average, the alpha at the old fund after the departure is lower compared with how managers performed at their new house.”

Rory Maguire, managing director at fund rating business Fundhouse, is more relaxed than many about switching to the a fund, saying: "We are very comfortable investing with a fund manager that has moved employers and we do this often. We tend to find that some fund managers are often better suited to their new employer.

“Take someone like Jeremy Podger at Fidelity. We knew him when he was at Threadneedle, and when he moved to Fidelity he achieved our top rating within a few months of joining. We felt that Fidelity was a strong home for him because he had excellent analytical support and could focus solely on his core skill: stockpicking.”

But he adds: “There are also many examples where the opposite is true – a fund manager joins a new firm but we no longer support them. This is often when we feel that they relied heavily on their colleagues, and when at their new employer there is an absence in this support. So it is case by case for us.”

Caquineau believes the reasons why fund managers tend to perform poorly in the initial period after they exit is that it may be a very large fund and those can underperform relative to markets, particularly if they have already enjoyed strong market conditions. 

Although the research indicates that around two-thirds of the managers who switch companies outperform on a five-year timeline, Caquineau says this statistic is misleading due to survivorship bias in the data.

Only the fittest survive

Essentially, the fund managers who switch company and then underperform are likely to be fired before the five-year time horizon is reached, meaning that if one crunches the numbers on a five-year time horizon, it is more likely that only the successful ones will be included.

Caquineau says performance outcomes were not dramatically different across asset classes. 

He says: “As alpha generation is a mix of luck (plentiful) and skills (scarce), it's not surprising that we don't find a strong relationship between alpha generated at the first firm and at the subsequent employer. The data shows a great variability around the mean: managers with a great track record at their initial employer may end up destroying value at the new firm and, conversely, fund managers with poor track records initially may improve considerably under a new banner.

“There are a few managers who successfully transitioned to their new firm and continued to generate excess returns for investors, but relying purely on initial track record to identify the best ones to follow looks like a loser's game. Other considerations can improve investors' chances of success, such as alignment of interests at the new firm, cultural and investment philosophy fit, level of resources, team dynamics and fees.”

Caquineau says one of the reasons why managers who left an employer following a period of underperformance could do better at their next company is that the investment style they deploy could come back into fashion. 

There are a few managers who successfully transitioned to their new firm and continued to generate excess returns for investors, but relying purely on initial track record to identify the best ones to follow looks like a loser's gameMathieu Caquineau, Morningstar

He cites the example of a fund manager who deployed the value style would have sharply underperformed in 2020 and 2021, if at that point they switched company; their 2022 performance, when the value investing style was to the fore, would have been excellent.”

More broadly, Yearsley says: “On the question of resource, it is of course important but it isn’t necessarily about the number of analysts they have, but also the quality. I think since the Woodford debacle people are a lot more wary of investing in firms started by fund managers themselves.

“The other consideration for me would be that I would be reluctant to invest in a manager that has been out of the industry for a while.”

Philip Milton, who runs PJ Milton and Co, an advice and investment management company in Devon, says: “In the vast majority of instances, we are stayers. If we liked the fund, the assets within and style and the new management is continuing the theme, we’d stay.”

David Thorpe is investment editor of FTAdviser 

david.thorpe@ft.com