the departures of rory powe from invesco perpetual and keiran gallaGher from newton are symptomatic of big changes in the sector
The past 12 months have not been kind to the long-established leaders in the European equity sector. A combination of poor returns, fund manager departures or both have affected the leading houses.
Invesco Perpetual's performance fall is well documented and now fund manager Rory Powe is to leave the group. Newton's Keiran Gallagher is departing to join LeggMason Investors.
Gartmore's Roger Guy has had a quiet year by his own high standards, as has Schroders' Mark Pignatelli following his move from Barings. There are plenty of pretenders in the wings trying to become managers of the next must-have fund.
William Russell, director of retail funds at RSA Investments, said: 'With the likes of the fund managers that have moved from Invesco and Newton, the volatility creates opportunities for us.
'There is mixed reaction as to whether people will stay with the fund manager, the group or reassess their investments all together. It has become evident with the likes of New Star that there is a growing trend to follow an individual with a track record.
'However, there is no guarantee that a fund manager in a different environment will generate the same returns. You have to ask yourself how much is down to individual or team talent.'
Paul Boughton, sales director at LeggMason, said: 'There is a trend to follow the individual which will benefit us when Gallagher joins. People have had concerns about research capabilities but there are adequate resources that can be used outside rather than in-house.'
Russell added: 'Europe is still a very competitive market and there are a number of groups who have had reasonable fund performance. However, we are seeing a trend towards fewer providers that have developed the ability to consistently outperform. There were a number of funds that did well in the growth period of the late 1990s but are suffering now. There is a lot of value in the consistency and stability of a team. It is also important for investors to look at the investment process and whether the manager looks at stocks on a geographical, sectoral or global basis.'
Michael Owen, director at Plan Invest, said: 'My European holdings with Newton are on hold. The group has a good investment process and we want to wait and see if performance will be affected by the departure of Gallagher.'
Mark Dampier, investment manager at Hargreaves Lansdown, believes others will follow Gallagher to LeggMason.
He said: 'He has not had a particularly great performance but everyone is entitled to a bad year. Starting afresh with a company that is almost boutique-like in nature may be very good for him.'
Owen is more concerned about Invesco losing Rory Powe. The Invesco Perpetual European Growth portfolio has taken a battering in terms of performance.
It has returned -23.7% on a three month bid to bid basis to 26 September, ranking it 73 out of 104 funds in the sector, and -56.4% on a one year offer to bid basis, which places it last out of 98 funds.
Powe, the lead fund manager, will be leaving at the end of the year to join the ranks of hedge fund managers. The fund will be taken over by Alister Hibbert, who is currently co-managing the portfolio.
Owen said: 'This is one of a number of fund managers who have moved this year. The loss of Powe, a well-regarded name, in addition to some poor performance, is a double blow for the portfolio. I am more concerned about the fund manager change with this portfolio than I am with Newton's because it is a much higher-risk product and I need to know whether it will be run in the same way or not.'
Dampier said: 'People who have moved out of the fund because of Powe's departure will have done so already. So much of a fund's rise or fall in performance is to do with style rather than stockpicking. Growth is out of fashion at the moment but it will come back.'
Advisers are tending to choose one or two funds to stick with through the current volatile climate. Owen currently has two favourites he is recommending to clients.
He cited Albert Morillo, who manages the Investec GF European portfolio. The AA-rated fund posted three-year returns on an offer to bid basis to 26 September of 10.4%, ranking it 13 out of 87 funds in the sector.
Owen said: 'The reason I promote his fund is that even though the one-year returns are negative, he has lost a lot less money than some of his peers.' Owen also favours Anthony Bolton at Fidelity for his consistently good performance. The Fidelity European portfolio is ranked first for the three years to 26 September 2001, with returns of 30.9% on an offer to bid basis.
Bolton is one of the longest-standing European fund managers, having been with Fidelity for 22 years and with the European fund since its launch in 1985.
Owen said: 'Fidelity has had a better performance record because of its style of management. It is stock selective but is not too aggressive and has a more value-driven approach. A lot of European fund managers have made money but Fidelity has outshone these.'
Although his main buys are Fidelity and Investec, there are others on his radar screen. He said: 'The European area has taken a turn for the worse and managers such as Davina Curling at RSA Investments and Adrian Farthing at Old Mutual are looking attractive.
'We are also looking at Chris Rice at HSBC. He is being nestled on our reserve list. If Investec came off our buy list for any reason, this is what we would replace it with.'
According to Owen, the problem with European funds is that they have been caught out by TMT stocks. He said: 'Certainly, Powe was heavily weighted in TMT with stocks such as Nokia and Ericsson.'
Dampier said Europe is a very competitive area and that it is important to be careful of taking too much of last year's performance data into account.
He added that the difference between the lower first-quartile and higher fourth-quartile ranked funds is only a couple of per cent difference in returns.
He said: 'We are in a bear market and things could swing very quickly so I would be wary of chopping and changing between funds. The names we are currently buying are Mark Pignatelli at Schroders, Adrian Farthing at Old Mutual and Investec's Albert Morillo, who is very experienced. We would even look at Rob Masters at JO Hambro, even though it is an offshore fund.'
In the current climate, Dampier is backing funds with a fair exposure to blue chips and is looking to combine several funds for clients, rather than relying on one.
He said: 'There is almost too much choice at the moment and in terms of performance, different managers will outperform in different markets. Any growth managed European fund will have fallen in the past year, while value plays such as Aberdeen European and Norwich Union European will have fared better.'
This awareness of the impact of style investing is one UK equity investors have also become aware of. The growing criticism of Perpetual's Neil Woodford for refusing to buy TMT when it was on the way up turned to a chorus of enthusiastic approval after March 2000.
Dampier said: 'If you jump out of funds now you would probably see the fund completely recover. People do not become bad fund managers overnight and you have to stick with them through the bad times. It can be more costly to change funds and you have to be sure of both your buys and your sells.'
As a rule of thumb, Dampier urges investors not to make too many changes to their fund exposure. He said: 'Often investors think being patient is not an investment decision. It would be very easy to think 'let's just get out of the Investec fund' but that would be a decision made on emotion rather than being sensible.
'If you had done that with Neil Woodford when it was down 10% because of having no exposure to tech, you would have missed it's subsequent rise.'
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