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Star fund managers By Jeff Salway
The cult of the star fund manager probably started in earnest with Fidelity's retiring guru, Anthony Bolton. After more than a quarter of a century generating annual compound returns of 20% with his Special Situations Is it wise, however, to stake your money on the reputation of an individual manager? And is it smart for groups to advertise funds on the back of individuals when there's no guarantee they will stick around? Research shows that just 15% of managers have run the same fund for over six years, 43% for four to six years, and 39% for two to four years. Similarly, 80% of fund managers at the top 50 UK fund providers have left their funds in the last three years. Around 60% of managers move because of offers from competitors - underlining the fact, perhaps, that good managers are at a premium. Management stability While stockmarket investment needs to be for the long term - five years at least - management stability is becoming a rarity. This is worrying for investors. While there's more to a fund than the person at the helm (the mandate and the quality of research), the managers are usually the key factor. "There are some extremely capable managers who make good stock picks and sound market judgements," says Phillippa Gee at IFA Torquil Clark. "Some funds do well because of their process, but you're more likely to find a star manager than a star process." The managers widely acknowledged as the best in the business include Bolton, Neil Woodford at Invesco Perpetual, Nigel Thomas at AXA Framlington, Derek Stuart at Artemis, and Gartmore's Roger Guy. However, some 'stars' are no longer in the ascendancy. Jeremy Lang at Liontrust was hyped as one of the best in 2003, but has since lost ground. In the three years to the end of 2006, his First Growth fund ranked just 153rd of 331 funds in the UK All Companies index. If you buy a fund on the basis of the manager's reputation, you're more likely to follow them when they leave. Justin Modray at Bestinvest cites the move made by Tim Russell and Chris Rice to Cazenove from HSBC. Cazenove launched funds for the managers to run and then sat back and watched as their investors followed them to the firm. Boutique funds But why are managers moving with such regularity? One reason is the increased prominence of 'boutique' fund management houses, such as New Star, Artemis, T Bailey and Neptune. The attraction of these firms for managers in more traditional fund houses is often the higher level of autonomy. In the three years to June 2003, the number of boutique-style groups and employee-owned fund houses rose significantly. On top of that - and a bonus for investors - is the fact that boutique fund managers often own or have a large stake in the business, which acts as an incentive to generate strong performance. High turnover has also been driven by an increased impatience with poor performance - some firms, such as Henderson, have replaced numerous managers in a bid to rescue poor results in recent years. While asset managers might be more demanding of their managers, this constant movement isn't good for investors. Increasingly, you can find that your hard-earned money is being run by someone who wasn't the manager when you chose the fund. If the manager was a factor in your fund choice, you obviously won't be happy - but does this mean you attached too much importance to the person running the fund in the first place? Big reputations can be deceiving. While the FTSE soared by nearly 20% last year, many star fund managers produced returns below that. An obvious example is Patrick Evershed, a favourite among advisers, whose New Star Select Opportunities fund returned just over 1% last year, putting it firmly at the bottom of the UK All Companies sector. Anthony Bolton, the biggest star of the lot, also lagged the index, although his return of 15.5% was markedly better than Evershed's. But perhaps the biggest surprise - to his supporters at least - was John Chatfeild-Roberts' Jupiter Merlin Worldwide Portfolio. It fell by 3.3% in the year to mid-January. If your manager moves "If they move to a similar organisation and take up a similar role, they may fit in quickly and be worth following," advises Phillippa Gee. "The movement of managers underlines the importance of keeping an eye on your investments and of getting advice. It's also a good argument for multi-manager funds." Gee says that while experienced investors will know about the manager, novices are more likely to identify with the name of the group. So, take note of the group's track record. If it has a lot of underperforming funds it smacks of complacency. While most big-name managers have earned their reputation, too many others fail to justify their fees. More importantly, make sure you put your money in a diversified range of investments, so if one manager doesn't live up to the advertising hype, all is not lost. Simple steps to pick a winner Don't judge a fund solely on its manager - you could be vulnerable if they leave. Check the manager's credentials. The firm's website will have details of the manager's process. How stable is the fund? Look at the level of turnover within the firm and the fund, and how long the manager has stuck around. If the manager has a good record, find out if the group has them tied down for the long term. Look at charges, especially if high charges haven't been supported by high performance. Compare a fund with its peer and sector. In boom times, even average funds can look good. Avoid funds where manager turnover has been consistently high, stability is important. Don't judge a fund purely on past performance, but if it's been poor for the last 10 years, it's probably not a great long-term bet. If you don't already have any fund investments, choose one that's diversified, like a global fund. Work out whether you want to be cautious, adventurous or in-between. Visit Interactive Investor's Fund Centre.
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