Managers on the move

As investor confidence returned after the recession, so it seemed did fund managers" willingness to jump ship or start up on their own. David Craik looks at what happens to their funds when they do

In recent years, UK fund management has bizarrely resembled football"s Premier League, with star managers spectacularly quitting their roles, leaving supporters - or in this case investors - in dismay. Their names may not be as recognisable as Sir Alex Ferguson"s, but they still resonate strongly with thousands of people.

Neil Woodford, who left Invesco Perpetual this April after 25 years to start his own business, is probably the stand-out name. He ran around £25bn-worth of savers" money in his Income and High Income funds, which alone notched up year-on-year returns of over 13 per cent.

Richard Buxton, who ran over £2bn for the Schroders UK Alpha Plus Fund, jumped ship in June 2013 after 11 years, to join rival Old Mutual. His fund had returned an enormous 254.4 per cent over the decade to 31 January 2013. And there are plenty of others who have gone in recent times, such as Jupiter"s Philip Gibbs and Liontrust"s Jeremy Lang.

So is this usual for the industry, or part of the aftermath of the financial crisis? And what happens to the funds when the star man leaves? What is the fallout for the ordinary investor?

Jason Hollands, Managing Director, Business Development and Communications at financial services group Bestinvest, says the turnover of top managers hasn"t been altogether surprising given that the industry typically has a reasonably high turnover rate.

“We estimate that retail funds change manager every five years, that"s slightly less than your average post-war UK economic cycle,” he says. “It"s a reflection of the fact that this is a competitive industry, where the rewards can be high for the most successful managers and therefore a degree of poaching is inevitable. Other managers crash and burn and are dispensed with.”

He adds, however, that cyclical factors can also lead to patterns in the level of manager moves. “There can be a tendency for managers to launch their own firms when times are good, or disappear into the hedge fund world where the rewards are higher,” he explains. “M&A in the industry can also lead to turnover as staff are culled and funds are merged. The emergence of new boutiques dried up during the height of the credit crisis, but we"ve started to see some signs of life again.”

He points to the launch of Sanditon Asset Management by ex-Cazenove Capital Managers Chris Rice and Tim Russell, and, of course, Woodford Asset Management, as prime examples of this.

“There does appear to be an uptick in manager moves. There"s certainly been a raft of high-profile departures over the last couple of years,” Hollands continues. “We know about Woodford, but there are also some firms who have very clearly been in the buy-and-build mode of late. Among the smaller players, Miton, Mirabaud and Polar Capital have been actively attracting new teams. There has also been quite a bit of turnover resulting from some big M&A deals in 2014 with Aberdeen Asset Management acquiring SWIP and Standard Life buying Ignis.”

Follow the star

Whatever the catalyst for change, the fallout for investors can be huge. Woodford actually announced his departure last October, and between then and March an incredible £3.6bn of savers" money, or outflows, left the funds as investors fretted over continued success.

Indeed the tremors continue. In August, Skandia said it was pulling £640 million out of the old funds and transferring it to Woodford"s new Equity Income Fund. At the time, the company announced the move had been made on the back of investor feedback and was in their clients" best interests. “Customers will continue to benefit from the proven investment expertise of Neil Woodford,” it said.

Elsewhere, after Buxton left Schroders, its hoard of £2bn-worth of investors funds dwindled rather quickly to around £1.3bn. Indeed almost immediately after Buxton announced he was leaving in March 2013, broker Charles Stanley stated it was removing the fund from its buy list until a successor was named.

Going further back in time to when Anthony Bolton left his Special Situations Fund in 2007 after 28 years, around £1.4bn was pulled out by savers from the £6.5bn fund - so this is not an entirely new phenomenon.

Emma Parr, Senior Associate at law firm Collas Crill, has worked for fund management firms coping with the loss of a key man. “Some act naively. They don"t realise that a lot of the clients aren"t following the fund, they"re following the manager. When he or she goes, they go too,” she says.

Hollands agrees: “Individual fund managers can have very strong personal followings. Woodford was the extreme example. Invesco Perpetual really haemorrhaged significant funds following news of his departure, despite the strong track record of his replacement, Mark Barnett.”

Nick Dixon, Investment Director at Aegon, picks up on this point and urges investors to stay calm when a fund manager leaves, because in the long run it"s likely they won"t end up out of pocket.

“Resist the urge to jump ship,” he says. “Investors should feel comfortable sticking with a fund because those who remove their money from high-performing funds purely because their celebrated manager has departed, could be missing out on benchmark-beating returns.”

Stick or twist?

Indeed, according to research from Aegon, nine out of 11 funds have continued to beat their benchmark following a star"s departure.

As a first example, let"s take Bolton"s Fidelity Special Situations. He achieved annual growth of more than five per cent above benchmark, helped in large part by not joining the dotcom party in the late 1990s. Replacement managers Sanjeev Shah and Alex Wright have seen 1.9 per cent growth above benchmark since 2008.

Buxton"s UK Alpha Plus notched up an annualised 4.1 per cent growth above benchmark. His replacement, Philip Matthews, has led 2.8 per cent benchmark-beating growth since July 2013.

Liontrust UK Growth lost star man Jeremy Lang in 2009. His benchmark beater was 1.8 per cent, which has actually been trumped by replacements Anthony Cross and Julian Fosh, who achieved 2.6 per cent. But as the Aegon report showed, it"s not all success stories - Jupiter Financial Opportunities, which lost Phillip Gibbs in October 2011 has seen negative growth under new boy Robert Mumby.

“Funds that consistently outperform their benchmark are few and far between, and those managers who develop a proven track record of success deserve their strong personal reputations,” says Dixon. “However, our analysis should be a wake-up call for investors - most funds continue to outperform benchmarks even after the star has departed. So-called star managers frequently rely on the ideas and technical analyses of their wider team, who will have been mentored and developed by the star to continue their legacy and investment process after their departure.”

But take another look at those performances by the fabled star players. Even Dixon"s survey shows they still largely outstrip the performance of their successors.

The lure of a star player can be difficult to resist. Investors will surely still be tempted to follow their favourite - their "money maker" - to pastures new.

So how can fund management firms best protect themselves from such a departure? Parr says more are using gardening leave restrictions and restrictive covenants, which puts certain limits on future employment such as taking existing clients (see box).

Hollands says fund management firms also have to look at their operating and training practices as well. “Some fund companies are more resilient to these changes because they operate more team-based approaches rather than rely on a star player,” he states. “Others emphasise the role of analysts in stock selection and this can make them less vulnerable to knee-jerk outflows when a manager leaves.”

Dixon adds that young talent must also be mentored by current fund managers. As for investors themselves, Hollands says: “We believe that when a fund has a change in manager you need to calmly reassess the case for holding it, starting with detailed scrutiny of the track record of the new incumbent. There"s rarely a case of a quick fire sale of the fund
- any deterioration in performance as a result of a new manager being installed will take time to filter through. Few managers will completely recreate a portfolio they have inherited overnight.”

Indeed, how many Manchester United fans swapped teams or stopped supporting when Sir Alex retired two years ago? The ties of football loyalty are no doubt stronger than that of investing - a gritty nil-nil away game at Stoke won"t stop you paying your private school bill for this term, but a misplaced asset will.

But the principle should remain the same. Take a rational rather than emotional response to a fund manager leaving - give it time and fully assess the ramifications. Who knows? The next generation may be even better than the last.