In the asset management business there's a lot of competition to attract star fund managers. A fund group will do just about anything to steal a great manager from their rival. This means fund managers often move from one group to another. That's fine if you're the fund manager but it makes it very difficult for investors to keep up. In the past month two star managers have announced they are leaving their existing funds.
Ed Legget, one of the top performing UK fund managers over the past five years, has just announced his intention to stop running his Standard Life Investments UK Equity Unconstrained fund. Ed returned an astonishing 153.42% over the past five years versus just 66.65% for the FTSE All Share.* Ed is now set to take over the Artemis UK Growth fund from Tim Steer, who is retiring. The other manager leaving is Jason Pidcock, star manager of the strong-performing Newton Asian Income fund. Jason has announced his intention to join Jupiter.
Should investors follow a star fund manager?
In many cases, a fund manager's new fund will outperform their old one. This is for a number of reasons:
Five recent fund manager departures and their subsequent performance versus their old funds.
Elite Rated Philip Rodrigs has easily outperformed his old Investec Smaller Companies fund since he left to move to River & Mercantile. The R&M UK Equity Smaller Companies fund is already more than 7% ahead of his old fund in less than a year.*
Ed Legget substantially outperformed both the market and his old Standard Life Investments UK Equity Alpha fund, when he stopped running it at the end of 2012, to focus on his Standard Life Investments UK Equity Unconstrained fund. In two and half years he was 18% ahead of his old fund.* Ed has just announced his intention to leave Standard Life and join Artemis.
Jeremy left his old Threadneedle Global Select fund just over three years ago and now manages the Fidelity Global Special Situations fund. Since his departure he has consistently beaten his former fund year after year and is now over 18% ahead of it.*
Elite Rated Richard Buxton famously left his Schroder UK Alpha fund for Old Mutual at the end of 2013. Since he left Richard is slightly ahead of his former fund by about 1.5%.*
Perhaps the most famous departure of all was when Neil Woodford left Invesco Perpetual in the middle of last year to found his own fund. Although Elite Rated CF Woodford Equity Income is barely a year old, Neil has had a fantastic start and is comfortably ahead of his former fund.
Performance is not guaranteed
Of course, just because a manager leaves it does not mean a fund is certain to underperform. A lot will depend on how easy the fund's strategy is to replicate and whether the departing manager is able to take most of his team with him. Funds can still do very well even after a star manager leaves and each situation must be evaluated on a case by case basis.
For example, although Invesco Perpetual High Income's performance has slightly underperformed the Woodford Equity Income fund, it is still substantially ahead of its benchmark and most of its peers. There is no guarantee that a fund manager will continue to outperform at their new fund. Whilst a fund manager is important there are many factors which determine whether a fund is successful, including the team behind the fund, the freedom afforded to the manager, the funds resources and the culture of the company.
There are ways to protect against fund manager departures, such as signing up for an e-newsletter to make you aware of the latest news. Chelsea Financial Services issues one such newsletter, and this includes any fund manager changes on the Chelsea Selection. To sign up, click here. Fundcalibre.com also offers a free e-newsletter service on funds for all investors. Click here to register.
Watch out for internal fund manager moves
Something which often catches investors off-guard is when a fund manager moves to a new fund in the same company. Ed Leggett is an example of this. His Standard Life Investments UK Equity High Alpha fund was one of the top-performing funds over a 5 year period, back in 2010. However, at the end of 2012, he left this fund to focus on his other Standard Life Investments fund, UK Equity Unconstrained. Since then, his Unconstrained fund has beaten his old fund by 18%.* In this case, if you followed the manager, rather than the fund, you would have been substantially better off. Again, Chelsea's e-newsletter can help you stay on top of events, as often these internal movements will have limited coverage in the national press.
Investing in new funds
When choosing a fund it's easy to get dazzled by past performance numbers but investors always need to ask themselves who was responsible for that performance. A fund may have great past performance numbers, but that may be irrelevant if the fund's old team and manager have recently left. The loss of co-managers and key team members are other things to be aware of.
As the charts above show, it pays to stay informed. Unfortunately managers will always move from one company to another. Investors in the Standard Life Investments UK Equity Unconstrained and Newton Asian Income funds will need to ask themselves some tough questions. Stay aware of any changes as it could have a big effect on your financial future.