The business impact of the move for Schroders has been significant, with the Schroder UK Alpha fund around £1.74bn smaller than when Buxton announced his departure. The impact for Invesco Perpetual of Neil Woodford’s departure remains unknown. To date the Income and High Income funds remain large – at £9.8bn and £13.8bn respectively – but the group is sufficiently worried to have moved both funds to bid pricing and for new manager Mark Barnett to suggest that he will be holding higher than normal levels of cash for the next few months.
The problem may be exacerbated by the Retail Distribution Review and the advent of clean share classes. It is no longer costly to switch; there may be no initial charges so investors are simply swapping one annual management charge for another. This could make them more fickle and less inclined to ‘wait it out’ as a manager leaves.
With this increasingly fluid market, is it worth fund management groups hiring stars? For example, might Old Mutual have hoped to receive a greater chunk of Buxton’s assets from Schroders? With the Old Mutual UK Alpha fund now £583m, there is a missing £1bn or more that has left Schroders but not reappeared at Old Mutual.
Investors are increasingly aware that strong performance from a ‘star manager’ may not be replicated in a new environment. The main piece of academic work on this was a 2004 Harvard Business Review study done on ‘star analysts’. It found that organisations should focus on growing talent within an organisation and then clinging onto that talent through thick and thin.
The research found that when a company hires a star, in around half of cases their performance plummets. Also, more often than not there is a sharp decline in the functioning of the team into which the ‘star’ is parachuted. This makes sense – introducing a ‘star’ into an established team could well be destabilising. The study also found that stars don’t stay with organisations for long, despite the huge salaries paid to lure them away from rivals.
Experience has taught investors to reserve judgement on fund manager moves or search for completely new alternatives, of which there are always a number available in a competitive fund management marketplace. There is also the unquantifiable ‘betrayal’ factor.
Companies can often suffer reputational damage from the fact that they cannot tell their best clients ahead of a wider announcement of a departure. Those best clients then feel let down.
Equally, star status can turn against a fund management group. Certainly Anthony Bolton’s difficult experience in China has had more reputational impact on Fidelity than it might have done had it just been an unknown manager.
Ultimately, the star game is a tricky one. Some groups clearly still believe that it is worth paying up for top talent, which can bring fund flows and kudos and may raise the overall quality of the team. But in the post-RDR world when brand names may not command as much loyalty and investors can switch easily and with relatively little cost, stars are becoming a more precarious investment.