Some big name fund managers are quite rightly held in client portfolios because they are genuinely great managers who deliver outperformance on a consistent basis. They are stars for a reason, and deservedly take in plenty of assets on the back of that.
Sector domination
Allied to this, though, is a strong element of wealth managers feeling obliged to hold certain managers and funds. Prior to Neil Woodford’s departure from Invesco Perpetual, a wealth manager would probably have had a tough job explaining the rationale to a client if at least part of their UK income investment was not with such a star name.
Even if the wealth manager found what he felt was an appropriate alternative to Woodford’s funds, and there were some downsides to investing with him in terms of the sheer volume of assets he managed at Invesco Perpetual, there must have been occasions where the client pointed out that everyone else they knew was with Woodford, so they wanted a piece of that action too. Other names, too, have come to dominate sectors on the back of being darlings of the industry.
Press-fuelled celebrity culture
Not only was Hodges’ departure a blow to Legal & General Investment Management (LGIM), but it means anyone invested in his fund now faces a decision on whether to stick with new manager, Martin Reeves, or to look elsewhere, perhaps for another star manager. This is not a new problem – it happens every time one of the big names moves, either to another group or to set up their own operation. It calls into question whether following so-called star managers is in fact the right approach.
Stuart Alexander, managing director of Gemini Investment Management, believes much of the blame for creating this star culture should be placed at the door of the press, saying: “Investors and wealth managers will buy fund managers on the back of the fact they are mentioned in the press. The wealth manager, almost by default, is pushed this way. The celebrity culture has followed managers such as Neil Woodford.”
Fund management businesses with a large advertising budget also often tend to get more support from wealth managers, in Alexander’s view. “It’s interesting to note that a large number of fund platforms want to know what your marketing strategy and spend is. None of this has anything to do with the fund, or its performance.”
Below the radar
Alexander says his issue is that there are many high quality fund managers out there who miss out through not being part of this star manager culture.
“They have a low profile, go about doing their job and deliver the numbers. Those are the fund managers people should be paying attention to. I have total respect for the likes of Troy and Chelverton. They’ve simply gone about delivering numbers. You want a fund manager who can articulate the story well.”
These boutique-style managers offer an advantage over their larger, star name counterparts because they are typically also owners of the business too, or at the very least equity holders. In short, it means they are far less likely to depart for pastures new. That should give investors some comfort that they can place assets with them over the long term should they, of course, be happy that the fund manager is delivering on what he has set out to do.
Funds of boutique funds
Wealth managers also need to take some responsibility in terms of differentiating their offerings and seeking out less well-known managers, in Alexander’s view. However, he understands that this can be difficult. A firm with significant assets can run into risk management issues if it tries, for example, to buy too large a percentage of a small fund.
Fund-of-funds managers such as John Chatfield-Roberts at Jupiter and the F&C pair Gary Potter and Robert Burdett have shown it is possible to build successful portfolios containing lesser known, boutique fund managers.
The question is whether wealth managers are brave enough to ignore the pressure from their peers, the press and even, to some extent, their clients, and to look further afield and break away from star manager syndrome.
