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Research reveals outperforming fund managers have seen their stars fade in new roles

Posted by Adrian Lowcock in Press releases category on 15 Apr 19


New analysis1 by Willis Owen reveals how star fund managers can underperform when they move into new roles. 

The analysis of investment funds that had ‘star’ fund managers join between 2013 and 2016 shows that on average, they have since delivered an average annualised deficit of -0.4% versus their sector peers. This contrasts with the average 2.3% annualised outperformance the managers delivered versus their peers over five years in their previous roles. 

Star Manager Performance at first funds

Average annualised
total return of first funds run by star fund managers
Average annualised
total return of Investment Association sector
Relative
performance difference 
15.8% 13.5% 2.3%
Star Manager Performance at second funds

Average annualised
total return of first funds run by star fund managers
Average annualised
total return of Investment Association sector
Relative
performance difference 
6.2% 6.6% -0.4%
Previous analysis2 by Willis Owen of 15 investment funds that had star managers leave between 2013 and 2017 revealed that the level of outperformance dropped dramatically after their departures. With the star fund managers at the helm, on average their funds’ annualised outperformance versus their sector peers was 3.6%. However, their successors delivered just 0.4% outperformance.

Adrian Lowcock, Head of Personal Investments at Willis Owen, commented: “Star managers do add value. There is plenty of research showing that. However, investors should not just follow managers blindly to their next funds. It is important to question where they are going, what they plan to do and how well supported they will be.

“It may be that investment processes will change, the market conditions in which the managers flourished may alter or they may not have the research and support available to them that they previously had. Each situation is unique and has to be judged on its own merits.”

Willis Owen’s star manager picks

Man GLG UK Income - This fund offers a highly disciplined, value-focused approach to investing in UK equity income. Henry Dixon's proven value approach underpins this fund. He targets companies trading below the team’s estimate of the company’s asset value and those where the company’s profit stream is being undervalued relative to the cost of capital, with the additional caveat of a dividend yield of at least that of the market. The fund also targets companies with net cash balance sheets and strong free cash flows, which can lead to positive dividend surprises. As well as the focus on valuation, the process also seeks to steer the manager towards elements of quality and positive earnings momentum. Finally the fund has a greater focus on mid-sized companies.

Lindsell Train Global GrowthNick Train believe that a highly concentrated portfolio of high-quality, cash-generative, strong and easily understood business franchises will outperform the market and reduce volatility over the long term. Accordingly, they use strict criteria aligned to this belief to significantly filter the universe.  A key strength lies in the managers' deep understanding of company strategies and their ability to see through the noise and buy stocks that are best placed to defend their business over the long term. The stock-specific and unconstrained nature of the approach results in significant differences to the benchmark. The managers' unwavering adherence to their investment philosophy and strong stock selection have resulted in considerable long-term success.

Man GLG Japan CoreAlpha - Stephen Harker is a contrarian investor, looking for companies out of favour with investors. Focusing on the largest 300 listed companies in Japan, he looks for those companies that appear to be undervalued when compared with rivals. He uses valuations measures including Price to Book, Dividend Yield and Price Earnings ratio to identify companies.  He selects companies with strong fundamentals and management where he believes there is the opportunity for a turnaround. Harker uses a rigorous, repeatable process that draws on the team's extensive knowledge of the Japanese market. With the clear focus on value, long-term investment horizon and no consideration for the benchmark the portfolio will differ from the index. 

1Source: Analysis of eight funds that had ‘star’ managers join between 2013 and 2016 compared with the managers previous performances
2Source: Analysis of 15 ‘star’ manager funds and what happened to them after their managers left. From the period 2008 to 2017.