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Shooting star

Date: 30 June 2022

It is the perennial question asked by the investment press - who is the next star fund manager? For UK investors, that status today probably belongs to Terry Smith and Nick Train, both of whom happen to have a fairly similar quality growth style. In the past, names such as Anthony Bolton, and dare I say, Neil Woodford, were household names. So, what exactly makes a star manager, are they a thing of the past and what are the pros and cons of investing with them?

Let’s start with a definition. A star fund manager really needs four qualities, in my view. Strong performance has to be top of the list, the very reason they are deemed to be a ‘star’. They clearly need to be the key decision maker, the trigger puller on investment decisions. To get that media attention, it’s likely that they are more vocal and catch the media’s interest because of it. Finally, a combination of these leads to asset flow and therefore they tend to be running larger amounts of assets or seeing significant inflow. There have been lots of articles proclaiming the star fund manager as a dying, or even dead, concept, but I’m personally quite sceptical that this is the case.That said, the concept may be evolving. What fund house would turn down the gift of someone who can both produce strong performance and market themselves well enough to attract significant assets?

What the phrase can also suggest is one genius investor working alone. This is unlikely to be the case these days, and this is likely where the evolution is taking place. Most fund managers will have a team behind them, whether that is one or two analysts or a much bigger team. Indeed, some recent research that I picked up off the excellent Snippet Finance, which referenced a paper by Harvey, Lui, Tan and Zhu showed that the number of funds run by single managers versus team-based approaches had fallen from 65% down to 20% in the last 30 years. Even 20% sounds a little high to me based on our fund investments. While this trend is clear, I’m not sure that means the end of the star manager though. For me, having a team behind them does not  fail the tests of whether this is a star manager. As markets become more efficient though, the need for greater resources to beat the market is clear.

Interestingly, the article suggested one of the benefits of a team was greater idea generation, which meant that funds were more scalable as assets increase.

That is another really important topic when thinking about star managers. As we have touched upon before, one of the major risks of buying into a star manager is whether you have invested after the best returns have been made, possibly because sizable assets have become a hinderance.

So, onto the pros and cons. An easy answer on the positive side - this is all about manager alpha and investing in a fund and manager that will produce long-term outperformance. If they succeed there, all else can be largely forgiven. The risks are certainly there though. We have already mentioned the risk of excessive assets, and Iwould add to that the ongoing risk that should the tide go out, flows can reverse quickly. Woodford was the extreme example, but it can happen to all. Star managers also attract ‘headline risk’. In the same way that the media has helped them to become more prominent, missteps, which will always happen in investing, will also be more of interest.

There is also the risk that your star manager ups and leaves from whichever asset manager they are at and sets up shop on their own, which brings with it uncertainties and potential risks. Some of those have been a success, others less so. The manager often goes from being solely focused on investments, to the wider responsibilities of running their own firm.

Lastly, on the side of the fund investor, it is important that these positions are sized appropriately and are not allowed to become excessive. No manager can consistently produce alpha year after year, and short term there will clearly be bumps in the road. Some will have bigger bumps than others.

I have seen some investors give too much weight to certain fund positions, especially in the ’star manager’ camp.

So, what should we conclude from this discussion? I think the view that star fund manager days are done is wrong - we will always be looking for figureheads and inevitably there will be some willing to take up that role to progress their fund. The risks lie in false expectations. We should be able to expect our active managers to be able to produce long-term outperformance. The risk is that those we put on a pedestal, for having done well for a period, can not sustain that level of performance due to increased assets, a changing market environment, or perhaps just a weaker period. Weighting that manager appropriately is the key. Lastly, the investment world is ever evolving. Gone are the days when a star fund manager was one man and his Bloomberg, if those days ever really existed. Star managers are much more likely to be backed up by some sort of team behind them and whilst they will be the key person on the fund, there is a bigger resource that goes into generating those returns.

This is a marketing communication and is not independent investment research. Financial Instruments referred to are not subject to a prohibition on dealing ahead of the dissemination of this marketing communication. Any reference to any securities or instruments is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned in it.

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