Last year I talked about the Manager Merry-go-round and the seemingly ever-increasing number of changes at the top of the fund management tree, with fund managers moving company, or funds being impacted by mergers and acquisitions at the company level.
Today I want to turn my attention to a slightly more predictable change, namely fund manager retirement. Of course this is an inevitability for all fund managers. In the UK, managers tend to retire nearer to 60-65, so it is a slightly more predictable task. Interestingly, in the US, there is much more of a culture by some to continue for as long as possible. Warren Buffett is the most obvious example of that, but I’ve come across plenty of US-based fund managers who cite more than 50 years’ experience on their team page.
Where we are invested in a manger where retirement is likely in the next five years, how should we think about this as fund selectors? Let’s deal with the risks first. The key risk is clearly that the successor struggles to continue the success of the retiring manager. Trying to assess that risk is not easy. The more forward-thinking fund houses might have bedded in the new manager alongside the incumbent and perhaps started to introduce them to clients, but that isn’t always the case. The retirement might also be a catalyst for some sort of tweaking of the process, perhaps moving to more of a team-based approach, or simply adjusting to suit the new manager’s own preferences for running money. One of the key considerations for me is how much the case for holding the fund is based on the abilities of the departing manager, and how much is based on the broader resources. In some ways, constraining the new manager to the identical process of their predecessor might be the wrong thing to do - if you want the best outcome, allowing the new manager to express their investment views in their own way might result in a better outcome.
One of the best examples I’ve seen is at Findlay Park, the Mayfair-based US equity manager. They have been extraordinarily successful over the years but have also managed the exit of the eponymous founders James Findlay and Charlie Park from day to day management with great success. What was originally a two person team running US small caps is now a much broader team holding primarily large caps. We can argue over style drift, but what Findlay Park have done very well is both communicate change effectively and ensured the quality of replacements are at least as strong.
For the most well-known star managers, what you are unlikely to replace is the X factor, even if that is simply their more outspoken views. James Anderson of Scottish Mortgage is a good example. I don’t doubt that his replacement will have every chance of doing an excellent job, but perhaps it will take a while before they are nearly quite as well known. Really that is irrelevant if you get the investment right, but some investors are more likely to head towards those well-known managers, not least retail investors who have less knowledge of the wider universe.
We also need to worry about liquidity risk - how much outflow might we see on the manager retiring, and how will that impact investor returns? Clearly each asset class and investment strategy is different in terms of how much of a risk outflows represent. What I’ve observed is that the longer the tenure of a manager, the stickier the assets tend to be. Why is that? One reason flows are likely to be more muted for longer lived investments is investor apathy. Funds that have grown rapidly over a relatively short period will have done so because investors have actively chosen to add to the fund for a particular reason recently and those investors will equally be more inclined to sell just as quickly. Those for whom this has sat in a portfolio for over a decade are perhaps less engaged with the fund. You only need to look at some consistently underperforming funds where assets have remained high to conclude that not everyone was taking a view that it may recover, but perhaps were just less informed about how its performance compared to the market and peers. Of course, if your manager change has happened within an investment trust then those liquidity issues don’t exist, but you do you have risk that it might move to a much wider discount, at least short-term.
It will be interesting to see whether COVID accelerates the pace of retirement. Among the high-profile retirements in the last 18 months or so, we’ve seen the likes of Alastair Mundy, James Anderson, Matthew Dobbs and Giles Hargreaves step down or announce their intention to do so. There will certainly be more in the pipeline, and I suspect most of us can think of a few names nearing the end of their investment life.
So to conclude, for investors holding a fund where there is a reasonable likelihood of a managed retirement, whilst less of a concern than an unexpected exit, there are a number of areas to consider before choosing whether to retain exposure or exit. For those that have good access to management, as we do, assessing the potential new manager will be important, along with any changes in expectations which that might bring. Equally, having a reserve option is important, and something easily planned. The two biggest risks are the potentially weaker performance of the successor, and for open-ended funds, concerns around liquidity post exit. As ever though, each case is unique. The only thing we can be sure of is that the manager merry-go-round will continue to spin, and us fund selectors will be challenged with each shift in management.