Should you invest in star fund managers like Neil Woodford?

by Rob Griffin from Moneywise |

'Star' fund managers have been in the news for the wrong reasons recently. So should they be avoided?

Everyone wants to hire the best person for the job. If you need a hip operation, your priority will be finding one of the country's best surgeons. If you are extending your house, a builder who comes highly recommended will be more attractive.

It's the same with fund management. Trusting your savings with someone at the very top of their profession enables you to sleep a little easier. It is why these individuals are hugely popular, with millions of pounds under management.

This is the thinking behind the creation of star fund managers. Fifteen years ago, this culture was at its peak with investment groups turning their best performing managers into household names in the hope of attracting more clients.

The concept made a lot of sense. Hire a superstar manager with an enviable track record and watch the money pour in as investors are seduced by the prospect of top quartile performance and bumper absolute returns. However, there are potential pitfalls.

In many cases, these star tags were awarded on the basis of a strong run of performance combined with savvy marketing and public relations, according to financial adviser Martin Bamford, managing director of Informed Choice.

"The 'star fund manager' trend appears to have faded in recent years, as investors have become better educated and some of the big beasts of the fund management industry have retired,” he explains.

The approach that is more favoured today in the world of active fund management is to focus on the broader team behind the portfolio and the process it follows. The latter, of course, helps safeguard the fund should key individuals depart.

"When selecting funds to recommend to our clients, we do consider the track record of the fund manager, but we're looking for consistency and risk-adjusted returns, rather than all-out performance," he adds.

The reality is there are no guarantees with investing. The history books are full of examples of successful funds running into trouble when the manager encounters a bout of underperformance or decides to move jobs.

Star names can also attract a lot of money – but an enviable reputation and previous success doesn't always mean investors should buy into their funds, points out Patrick Connolly, a chartered financial planner with Chase de Vere.

He cites the example of Neil Woodford, who made his name at Invesco Perpetual UK Smaller Companies investment trust (LSE:IPU) by studiously avoiding technology stocks in the dot.com boom of the late 1990s – a decision that was vindicated with the bubble burst a few years later.

"He was heavily promoted by execution-only brokers after setting up Woodford Investment Management and the funds he launched proved popular," he says.

"However, his performance has been terrible and, with many investors selling out, he has been forced to suspend trading in his flagship Equity Income fund."

Another shocking example was the special situations fund from Solus.

Under the leadership of Nigel Thomas, it became one of the high-flying offerings of the late 1990s. From January 1996 until he relinquished control in February 2001, the fund delivered an astonishing return of 355.07%, compared to the 96.99% average.

However, the subsequent two years were abysmal, with the fund producing a miserable loss of 57.55% between 5 March 2001 and 3 March 2003 – considerably worse than the -36.22% sector average.

Mr Connolly favours funds that can provide consistent long-term performance, which he is confident can be replicated. Generally, he will stick with good-quality managers over the longer term – even during dips in performance.

"You need to understand why a fund is underperforming and then consider if anything might change in the future," he says.

"To do this, you need to have a good understanding of the investment manager running the fund and the approach they take."

In addition, you should only follow a fund manager to a different company if you are confident performance will be replicated.

"Much like football managers, they might not be able to perform in a different environment, with different resources or support," he adds.

Adrian Lowcock, head of personal investing at Willis Owen, believes there are only a relative handful of 'star' names.

"New gladiators have entered the ring – and, whether or not they sought star status, they are now among the most famous managers," he says.

He highlights Nick Train of Lindsell Train and Fundsmith's Terry Smith, suggesting their success is driven by a combination of style bias and their simple approach to investing with a long-term focus.

However, that's not to say quality managers are thin on the ground. "There are plenty that would probably warrant the status but because of the asset class they operate in or their personality they don't seek the limelight and are happy to get on with the job," he adds.

One to watch: Terry Smith of Fundsmith Equity

Terry Smith has an enviable reputation in the fund management industry. He is chief executive and chief investment officer of Fundsmith Partners, which he founded in 2010, and runs a hugely popular fund in the shape of Fundsmith Equity.

Martin Bamford, managing director of Informed Choice, is a fan.

"He's probably the only ‘star' manager I would rate today as he has done impressive things with Fundsmith Equity," he says.

"However, it's his conviction and methodology I admire, rather than his performance track record."

The aim of Fundsmith Equity is to invest in global equities, with its approach of being a long-term holder of its chosen stocks. Currently, its largest holdings include PayPal (NASDAQ:PYPL), Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB) and Philip Morris (NYSE:PM).

It suggests these names are 'just a small number' of high-quality, resilient, global growth companies that are good value and intended to be held for a long time.

Mr Smith, who started out at Barclays Bank in the 1970s, joined wealth management firm Collins Stewart in the mid-1990s, becoming chief executive in 2000. He then led the management buyout of Collins Stewart, which was subsequently floated on the London Stock Exchange.

Fundsmith insists rigorous research is central to its business, with the goal being to produce a portfolio of resilient businesses delivering excellent performance. Minimising the costs incurred is also important.

Fundsmith Equity

Value of £100 invested in the fund over five years

Year 2014 2015 2016 2017
Fund movement in year (%) 23.33 15.7 28.16 21.97
Value of £100* 123.33 142.7 182.88 223.05

* The £100 was invested on 1 January 2014. Source: Moneywise.co.uk

Manager Terry Smith
Launch date 1 November 2010
Total fund size £17 billion
Minimum initial investment £1,000 lump sum or £100 per calendar month
Minimum additional investment £250 lump sum; monthly investments can be increased to any amount above £100
Initial charge None
Ongoing charge 1.05%
Annual management fee 1%
Contact details for retail investors Fundsmith.co.uk; 0330 123 1815

ROB GRIFFIN writes for the Independent, Sunday Telegraph and Daily Express.

This article was originally published in our sister magazine Moneywise. Click here to subscribe.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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