February 2012

STAR MANAGERS: When teamwork matters

Star_managerThere are some fund managers who always appear to be in the spotlight. But, asks Stefanie Eschenbacher, who is really pulling their strings?. A favourite phrase in fund marketing is the “star manager”. Even though performance can be objectively measured and compared, there are some fund managers who always appear to be in the spotlight. Marketing departments – or newsrooms, for that matter – like to refer to them as star managers. But how does a fund manager become a star? How much of this is based on long-term performance? How much of this image is created through clever marketing and sensationalist media? “However good a manager is, one needs to be backed by a good marketing team or one will never be deemed a star manager,” says Ed Moisson, the head of UK and cross-border research at Lipper. Moisson and other experts argue there is no straight divide between a single-manager and a team approach when it comes to asset management. In most companies, even a single manager will not be working in isolation but as part of a team. Gulnur Muradoglu is a professor of finance at Cass Business School in London and the director of the university’s behavioural finance working group.  Highlighting that not a lot of work has been done on star managers, she points to research at the macroeconomic level that has shown bilateral trust among nations increases economic exchange. Similarly, behavioural finance suggests individuals are more likely to trust someone with their money if there is a certain degree of “familiarity” and “availability”. Such perceptions, she explains, can be created if managers are visible in the press or engage with  their investors otherwise. “People who have a highly valued social characteristic, went to a good university and work for a good company also tend to be trusted [more easily],” she says, adding that a CV is a major factor when making such judgements. Performance appears to be just as important as “a common interest” when it comes to trust, she says. Many people lost trust in managers during the financial crisis, Muradoglu continues, when they had to take pay cuts, yet managers were rewarded with bonuses despite poor performance. “A past relationship is a reason for trust,” she adds. Whether an asset manager will allow (or actively promote) a star culture, depends on internal organisation, management and processes. Moisson adds: “It has probably more to do with how that team makes decisions, without it turning into a constant round of committee meetings, and how the investment team gels.” Gokhan Saruhan, the head of fund research at S&P Capital IQ, says if a manager has performed strongly – even over a short time – the asset manager is likely to take advantage of this and promote this particular fund.  The bulk of marketing is typically done at launch so the asset manager can raise enough money to reach a critical mass and make the fund economically viable. After the launch period, however, marketing efforts are concentrated on better performing funds. Ben Yearsley, an investment manager at Hargreaves Lansdown, says an asset manager is unlikely to promote a fund that has been fourth quartile over three or five years. While marketing content is usually “not taken seriously”, he says, it creates brand awareness and brand trust. “Marketing does make the job of an independent financial adviser easier,” he concedes. “It is easier to sell a fund when it is well known.” Troy Asset Management, on the other hand, has been successful despite little marketing efforts. Marketing-heavy New Star Asset Management, which was acquired by Henderson Global Investors in 2009, had gone “too far” in Yearsley’s opinion. Human aspect
The star manager culture is something known to retail investors, rather than the institutional ones. Saruhan says institutional investors tend to favour consistency and stability, which is generally associated with a team approach. “It is easier to promote one individual because it is more concrete,” he says, adding that talking about a team can be vague. “Star managers tend to spend more time in marketing. We would like to see the manager investing and managing the portfolio, rather than promoting the fund.” Fund managers with significant responsibilities other than managing the portfolio are likely to see their evaluation negatively impacted. Saruhan says dealing with marketing-related activities “takes away resources” from the fund. Richard Romer-Lee, a joint managing director at OBSR, takes a different stance, arguing it is a positive sign if a fund manager engages with investors. This entails, for example, writing reports on a regular basis, explaining what changes the managers are making to the portfolio and how this is likely to influence performance. “It is important for fund managers to remember whose money they are managing,” he says. “There is a human aspect to fund management, which is of paramount importance.” Richard Buxton, now the head of UK equities at Schroders Investment Management, joined from Barings saying he would spend a certain amount of his time doing consultation. Romer-Lee says Buxton has stuck to his promise in times of positive and negative performance, even after he had raised billions of pounds.  The same can be said for the energy and resources team at BlackRock. Though he dislikes the star manager label, Romer-Lee says there are outstanding individuals in the fund management space. Neil Woodford, the head of investment at Invesco Perpetual, is often perceived as a star manager. The media – which is usually quick to label him as such – questions every single one of his moves. Romer-Lee says a manager needs not only a conviction but also the confidence to follow it, and stick with it in times of short-term underperformance. “The harsh reality is that people are the most important part, whether that is one individual or a group of individuals,” he says. “They need to have a clear understanding of what their edge is.” Another important factor is for fund managers to be in the right environment, with a supportive team, appropriate resources and a flexible investment mandate. There is an argument that a team approach provides more consistency and potential errors are corrected. Aberdeen Asset Management, for example, has been successful with a team approach. A major concern with a single-manager approach is succession; one who leaves jeopardises the stability of the fund, which can result in outflows. Fidelity Worldwide Investments split Anthony Bolton’s Fidelity Special Situations fund in 2006 because it became too large, losing the ability to trade small and mid-cap equities efficiently, potentially arresting performance. This split allowed the funds to use the wider investment powers available under the Ucits III regime. Bolton continued to manage the UK portion of the portfolio, the UK Special Situations fund, while Jorma Korhonen took over the global portion, the Global Special Situations fund. A year after the split, Bolton handed over his fund to Sanjeev Shah. Romer-Lee says Korhonen’s performance has been poor, but it is still too early to say if Shah can live up to the expectations. Korhonen left at the end of last year after a period of lacklustre returns. Jeremy Podger, the head of global equities at Threadneedle Investments, has agreed to take over in March. Bolton returned to fund management in April 2010 with the launch of Fidelity China Special Situations. Even though it failed to reach its target size of £630 million it became, with £460 million, one of the largest investment trusts ever launched in the UK. Since then, Bolton’s investment trust has seen its net asset value fall dramatically, and was hit by fraud allegations. Analysts say it is too early to judge his performance. Moisson, Romer-Lee and Saruhan all warn of placing too much weight on short-term performance. The question of succession remains a difficult one. In some cases, however, the successor has exceeded the expectations of investors. Richard Pease’s two successors, Leon Howard-Spink and Cedric de Fonclare, have both impressed Romer-Lee after they took over the Jupiter European Special Situations fund. Performance
There is also the question of what happens when a fund manager no longer delivers. Bill Miller, the manager of the Legg Maison Capital Management Value Trust, became famous when he beat the Standard & Poor’s 500 Index for a record 15 years up to 2005. Last year, he announced he would step down from his main fund after lagging the index for four of the past five years. With quantitative easing at a record high and interest rates at a record low, the past couple of years have been a challenging time for fund managers, even the outstanding ones. “Different markets help to shape an individual,” Romer-Lee says, noting that they “learn in the face of adversity”. If anything, the financial crisis may have helped to create a new generation of star managers. Emphasising the importance of a long-term track record, experts say it is too early to make a judgement about who these might be. However, Romer-Lee highlights Rob Brunett at Neptune Investment Management, Cedric de Fonclare at Jupiter Asset Management, Philip Rodrigs at Investec Asset Management and Adam Avigdori at BlackRock. Most of these star managers, it appears, are working for asset managers based in the UK or the United States. This appearance is deceptive, though. “Perhaps there is more marketing effort in the UK, but it is a worldwide phenomen,” says Romer-Lee. In Europe, asset managers like Carmignac Gestion and Skagen Funds have impressed him. “Every time a single manager is associated with good performance, there is more marketing effort to emphasise it.” In the end, a long-term performance record is critical. Most emerging markets are not mature enough to have produced a star manager, because there is no long-term track record. Romer-Lee says there are no individual managers who have caught his attention in the Middle East and Africa, nor in Latin America. In Asia, Angus Tulloch, a joint managing partner of the Asia Pacific and global emerging markets equity team at First State Investments, and Hugh Young, the managing director of Aberdeen Asia Pacific, have led successful teams. Romer-Lee also singles out Martin Lau, the director of Greater China equities at First State, Allan Liu, the manager of the Fidelity South-East Asia fund, and Ezra Sun, a fund manager and head of Far East at Veritas Asset Management. As financial markets have not made a full recovery, it may be too early to shine a spotlight on new star managers. ©2012 funds europe

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