September 2011

PERFORMANCE: It’s a matter of time

DisasterThe effect of a fund manager’s tenure on the performance of the fund they manage appears to be very real. Nick Fitzpatrick looks at Lipper data provided exclusively to Funds Europe that suggests tenure – and probably age and experience – should be a factor in fund manager selection.
A week into the summer share dive that began at the turn of August and ask Harry Nimmo, fund manager at Standard Life Investments, how he has reacted to the stock market panic. He says: “I’m not doing very much to be honest. I nibbled a bit yesterday in a minor way, buying some stocks.” And that’s it.  As stock markets shed trillions of dollars and see some of their longest consecutive losing streaks in recent years following the American downgrade and as fears about the European economy increase, Nimmo has a nibble.  This near total lack of excitability on Nimmo’s part while across the Western world fears of another recession break out is all the more surprising when you consider that Nimmo runs SLI’s smaller companies strategy. Surely smaller companies are the first to go to the wall in a downturn – at least that’s what they say. Over in Zurich, another fund manager, Scilla Huang Sun, who runs the JB Luxury Brands Fund at Swiss & Global Asset Management, is similarly playing it cool. “Do not panic,” she says. Then she adds: “A big part of a fund manager’s role is to manage the emotional part of their job, both to do with the markets, and to do with ourselves.” So what has given Huang Sun this perspective? Well, it’s neither her PhD in economics from the University of Zurich, from where she graduated summa cum laude, nor is it paraphrased from that ancient book of wisdom Sun Tzu’s The Art of War, even though it sounds like it could have been. What Huang Sun and Nimmo both have in common isn’t just age and experience (he’s 54, she’s 46), but also the tenure in the strategies they run. They’ve both been at it for a relatively long time.Throughout that time they’ve produced solid returns. Since the launch of Nimmo’s fund in January 1997 it has returned 15% per annum. It returned 46.9% year to June 30, 2011, against a peer group benchmark of 36.4%. Nimmo is also AAA rated by Standard & Poor’s. Huang Sun’s luxury goods fund, which she launched for Swiss & Global in 2008, had returned 50.1% by the end of May this year, and 7.5% year-to-date at 31 July 2011. Although she only began running this strategy for Swiss & Global in January 2008, she ran the same strategy previously for eight years at Clariden Leu. But does the reasonably long tenures of the strategies they steer, or their age, really have anything to do with their pleasing performance? And if it has, can this be generalised at all across the industry? Outperformance
Figures produced for Funds Europe by Lipper, the funds research and data provider, strongly suggest the answer is yes. Analysis based on nine sectors of funds in eleven different European domiciles over one to 15 years shows that just over two-thirds of the time (67%), the average performance of funds with a manager retained throughout have outperformed their competitors.  For example, among equity funds investing in Asia, those funds with a manager in place throughout a period outperformed the average of all funds by 2.32% over three years, by 10.78% over five years, by 20.12% over ten years, and by 22.20% over 15 years (see box below). “From this initial research there is a clear indication that investors should include the length of a manager’s tenure among their selection criteria,” says Ed Moisson, head of UK, Ireland & cross-border research at Lipper. This leads on to the issue of fund manager risk, Moisson says. One of the reasons why an investor chooses an actively managed fund will be the identity of the manager and the reputation that he/she has built up. Moisson adds: “Coupled to this is the inevitable risk that a good fund manager may leave. Of course just because a manager has been in place for ten years, there are no guarantees they will stay, but it must surely give some reassurance. “Clearly a good longer-term track record is worth its weight in gold, not just silver.” Gary Potter, co-head of multi-management at Thames River, which is part of London-listed F&C, is open about his preference, typically, for managers with maturity. He says he’s long on grey hair, short on hair gel. Potter, whose retail fund of funds has around £1.5bn (e1.7bn) of assets, says: “We’ve seen a lot of careers start, end, flourish and collapse. If there’s one hallmark we have, it is a fund manager’s experience factor.” A ‘guestimate’ for the average age of the manager that his fund invests in is somewhere in the 40s, he says. “It’s not necessarily age but maturity,” he says. Of course there are other criteria too – culture and reward structure, for example – but “pedigree and maturity make certain groups stand out”. Calm in a crisis
“2008 was a good year to find managers,” continues Potter. Testing times like this are good to observe managers’ behaviour. “Bear markets, bull markets, recoveries, the Russian debt crisis, the Latin American crisis, and recessions – observe managers in these difficult times and look at how they articulate themselves. It’s that maturity that we are looking for. “There are periods when these managers do not have a good time, but sticking with maturity and their tried-and-tested capability … we find they do generally deliver.” It wasn’t so much of a crisis for Burberry, the luxury clothing house, just a ‘bad fashion moment’ when the British underclass usurped the company’s more desired customers to become those most identified with the company’s iconic check. Burberry reportedly put this shift in its customer base down to poor Christmas sales in 2004. The event was a test of Huang Sun’s emotional poise. The bad image of Burberry was limited to the UK, where much of its investor base is, but we noted that in other parts of the world it was doing a great job,” says the fund manager, whose parents are Taiwanese but who has spent most of her life in Switzerland. In fact she cites Burberry as one of her most successful stocks, alongside Swatch and shoe maker Tod’s. “You must not get too paranoid about noise,” she says, talking about recent weeks. “In times of market volatility when stocks move around a lot, you have to be disciplined and question whether you are doing the right thing.” The recent turmoil has resulted in Huang Sun selling certain stocks in which she had less conviction. She calls this a “cleaning” of the portfolio. Asked what mistakes less experienced equity investors may make, she says forgetting to manage the downside is one.  “What I try to tell younger colleagues is that the goal of a good portfolio manager is not to find the best attackers, but to bring together the best team that can win more times than they lose in difficult market environments.” Over at SLI, Nimmo says: “I’ve been through quite a few market cycles. I’ve seen bull markets and bear markets and they can be pretty scary. Some of the time you wonder what’s going on. “Since launch in Janauary 1997 this will be the fourth bear market the fund has been through. The process works well in difficult market conditions, thus there is no mileage in changing the fund process.” Asked about common mistakes he’s seen managers make, Nimmo says: “High dividend and low PEs can be value traps. They can be signs that there are problems in the business. I’ve seen manay fund managers get coaught out by this.” He also warns about valuation targaet. “One this that has low predictability is valuation. We do not have price target and we do not look for stocks that are traditionally ‘cheap’.” Even more experienced managers can have bad periods. Nimmo’s fund dropped 19.9 % year to June 2009 – albeit that was in an exceptional period and the fund still dropped less than the IMA UK Smaller Companies Sector average (-20.6%). Sticking by these managers may work out in the long run - as long as fund size doesn’t burden them. Nimmo manages £1.3bn (at July 31) in his fund and Huang Sun circa e175.83m in the euro fund. By mid-August markets had rebounded but then began to sink again on Thursday 19. 2010 saw mid-year jitters too. A strong rally followed in the second half of the year. Could history repeat itself? If it does, inexperience will see all memory of the difficult summer erode – and that’s when the more experienced managers worry the most. “The most worrying period for me, in terms of underperformance, is the recovery phase,” says Nimmo. “When bears turn to bulls then it’s low-quality companies that start to outperform and I may start to underperform.” ©2011 funds europe

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