Although many star fund managers have changed employerin recent months, any decision to follow in their footsteps should only be taken after careful analysis of the manager'snew working environment
While the investment process used by fund managers may have changed little over the years, the way it is communicated to advisers and investors has been greatly influenced by one key event ' Morgan Grenfell and Peter Young.
The negative publicity generated by these events highlighted the need for a system of checks and balances for all involved in the fund management process, no matter their reputation, skill, or otherwise.
Although the Morgan Grenfell issue was speedily and fairly resolved, this was a wake-up call for the fund management industry, acting as a timely reminder of what can happen if a star manager is permitted to operate without controls.
From then on, compliance departments have sought to ensure that their investment processes were clearly structured and repeatable. However, it has not been enough that the process has had sufficient checks and balances ' it needed to be seen to be whiter than white.
This highlights one of the enduring ironies of the fund management industry. Groups are only too willing to promote the star when everything is going well and business is flooding in on the back of their successes but when they leave, it is back to stressing the importance of the team structure. This is only natural as a star fund manager can attract many millions of pounds to a fund, thereby enhancing the group's core income.
What we need to understand when analysing a fund is the team dynamic. This has always been important but in light of the recent high-profile fund manager defections, advisers need to pay more attention to it and its repercussions.
When it comes down to it, you do not want to invest in a fund where there is no realistic succession policy or the expertise and knowledge is not widely shared. The average tenure of fund managers is not long and given this, there is every chance that they will leave at some point when your clients are still invested.
Despite the team approach seeming such an obvious goal, it does have constraints. Investment is all about informed opinion and strong decision-making. Somebody needs to make the ultimate decision and investment by committee is not something that most advisers would want to see introduced.
The investment process needs to be robust enough so that it functions beyond the individual level yet flexible enough to nurture and develop individual fund manager flair. Getting the right balance in this control and management structure is crucial to the success of the investment process and, ultimately, the fund's performance.
The process of course is not the whole picture, you still need the basic raw materials ' namely people. It is the successful combination of these two ingredients (process and personnel) that makes all the difference to performance.
That said, fund management is no different to any other occupation and there will always be turnover. Whether it is due to more money, more responsibility, greater challenges or a better working culture, fund managers will move on from time to time and we therefore need to be able to deal with the implications.
The most immediate question is whether the best advice is for clients to follow the star manager or hold off and see how the new fund manager performs. The natural response for most advisers is to adopt a wait-and-see approach. This buys time for the new manager and allows them to stamp their own mark on the fund. But how long should this trial period last ' three months, six months or even a year?
Ultimately, we need to ascertain whether there is any evidence to suggest that a fund's performance necessarily suffers when a star fund manager leaves. If we could demonstrate that there is an immediate deterioration on average, then the decision to follow the high-profile fund managers starts to look more persuasive.
To analyse this area, we shall focus on the experience of five star managers who have moved group over the last couple of years. These managers have been chosen to reflect a range of sectors and also because sufficient time has elapsed since the move to enable a sensible comparison.
In order to analyse the before and after position, we need to account for the different investment periods and the risks incurred in achieving performance. To do this, the analysis will use information ratios calculated relative to the benchmark index. The time periods under analysis are of equal length.
Operating in a similar way to Sharpe ratios, the information ratio seeks to measure the fund's trade-off between return and volatility. However, rather than using risk free assets as the comparison, information ratios measure against the median. With both ratios, the higher the number the better the return the fund has delivered given the risks taken.
The table highlights that of the five funds reviewed, the relative, risk-adjusted performance of the star manager was superior three times (60%). This suggests that investors would have done better had Adrian Frost, James Abate and Richard Pease remained managers of the respective funds. However, care is needed in avoiding an over-simplistic interpretation.
First, it was only possible for retail investors to follow one of these star managers when they moved on. Littlewood, Frost and Abate initially left the industry (the latter two having now returned) while Woolley has yet to launch an open-ended alternative. Only Richard Pease, on his move to New Star, offered any form of continuity for investors in Jupiter European.
The second issue with this analysis is its very short-term nature. The longest period analysed is only 22 months and thus it is dangerous to draw too many hard and fast conclusions. New managers tend to want to impose their own stock ideas on the fund and hence the early months of a changeover can see increased turnover within the fund. This can have a detrimental short-term effect on performance.
Finally, while the small sample size is sufficient for the purposes of this overview, it would be a constraint for a more in-depth analysis.
This analysis has sought to find answers and within the chosen sample, it would appear that the power of the star manager is reinforced. However, with a 40% probability of the new manager improving performance, it would be impossible for any adviser to make sweeping assumptions when advising clients.
Although investment is regarded as a science, there is an art to its implementation. Experience, judgement and even luck all play a part in creating the star manager and there can be no guarantees that the change in fund management group will provide the same conducive environment for the manager.
Let us not forget that the star manager is the public face of a broad team of investment professionals all feeding the necessary information, from which they are then able to make an informed investment decision. This is not to downplay the importance of the manager, with whom the buck does eventually stop, but rather to highlight that few operate in perfect isolation.
Any decision to follow the star manager should not be taken simply out of blind loyalty but should come only after careful and in-depth analysis of the environment that they will be moving into.
Some of the key questions that must be answered include:
• Was the star manager really a star or were they the front man for an exceptional team?
• Will the level of research support increase or decrease at the new group?
• Will the sales and marketing function at the new group deliver the flow of new monies to build a credible fund size for them to manage?
• Will the star manager be allowed to continue with the same investment style or will the house style impose the need for compromises?
• Will the star manager be involved in commitments other than managing money (such as managing a team)?
• What is the manager's level of commitment to the business (share options and golden handcuffs for example)?
• Is the culture of the new group significantly different to where the fund manager has come from and is this an issue?
Fund managers have become stars because of their track record of outperformance among their peers. Past performance may not be any guarantee of future returns but the consistency does provide a powerful indication of the quality of the investment process.
If we assume that the manager is one of many variables that combine to make the process what it is, then the key question must be: is the whole greater than the sum of its parts?
In summary, the decision to move or stay is not black or white. At the point when any fund manager (whether they have attained the legendary star status or not) leaves, fund management groups and advisers have clear responsibilities to investors.
Rather than getting overly influenced by reputation, premature press speculation or inertia, advisers must take a step back and make an objective assessment of the options.
The Peter Young affair was a timely reminder of what can happen when managers operate without controls.
Information ratio seeks to measure a fund's trade-off between return and volatility.
There is no guarantee that a change in fund management group will provide a conducive environment for star managers.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress