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Are investors dazzled by stars in their eyes?

At first glance, Nicola Horlick&#39s criticism last week of the star fund manager culture would appear to make no more sense than Big Brother&#39s Nasty Nick disputing the power of television to deliver instant fame.

Horlick is probably the UK&#39s highest-profile star fund manager, being one of the few who can be regarded as a household name.

A quick search of the British press finds 1,552 mentions of her name over the past five years – almost 1,000 more than Merrill Lynch&#39s Carol Galley and former Jupiter fund manager William Littlewood.

Even investment commentator Mark Dampier, who manages to make an appearance in most personal finance feature articles, only managed to record a measly 948 mentions.

But it is not the media&#39s liking for stars that Horlick takes issue with or even the fact that most investment houses have one individual as the face of a fund. Her gripe lies with the houses which claim a fund&#39s investment performance is driven by one person – a fact she disputes is possible in today&#39s markets.

Horlick says: “You need to be able to identify a talented individual because that is what people want. They want to be able to identify the person who is making the ultimate decisions.

“But the ideas that find their way into the portfolio have come through serious discussions with a number of people in a big team gener-ally. They are not just the ideas of, say, Horlick or Katherine Garrett-Cox. The idea that a fund is the creation of one individual is just nonsense these days.”

Horlick also believes many fund management houses mislead investors by not making them aware of how much risk they are exposed to in a fund. Without naming and shaming, she cites the example of a European growth fund which has come unstuck after taking heavy bets on technology over the past two years.

In her own house, SG Asset Management, she says the managers go to great lengths to ensure investors know exactly what level of risk they are taking on.

She says: “We do not want a maverick fund manager performing fantastically well one year but who ends up at the bottom of the pile the next year. From the point of view of the investor, that is a scary rollercoaster ride. I do not believe that is what investors want. They want to be able to sit back and feel they do not have to worry.”

Undoubtedly, Horlick is right that every fund manager needs back-up, be it from detailed company research or simply from a Reuters screen. However, the argument that no individual can be solely responsible for the performance of a fund is slightly more contentious and is not accepted by much of the industry.

Jupiter has established itself as a house which encourages individuality and fosters the star fund manager culture. Joint managing director Steve Glynn believes too much emphasis on the team approach can end up being counter-productive.

He says: “The problem with committee-based decision making is that more often than not the decision of the committee ends up being the lowest common denominator.”

Glynn admits there are some advantages to exploiting a talented team but he maintains that an individual can be a fund&#39s driver. “At Jupiter, we are very fortunate to have a number of first-class fund managers. It would be daft not to give managers the chance to challenge each other&#39s decisions and discuss ideas. We believe it is essential to have an individual who drives the fund but that has to be carried out in a team-based culture.”

Statistically, the facts are not clear cut. Certainly, there are a number of managers who outperform more consistently than others. However, over a fiveto 10-year period, only a handful of funds have managed to outperform their benchmark every year.

The difficulty lies in deciding how much of a fund&#39s performance is down to the manager&#39s skill and how much luck has played a part.

Perhaps the test is to watch a fund manager as they move from house to house. Nick Train, who quickly built up a reputation as an income fund manager at GT in the 1990s, produced relatively poor performance after his move to M&G in 1998. Yet Justin Seager, who moved from Dresdner to take control of Jupiter&#39s UK growth fund from Edward Bonham-Carter at the end of last year, has maintained strong top-quartile performance over the last six months.

Evidence would certainly suggest some managers are more capable of stockpicking and producing consistent returns than others. But as markets grow and become more sophisticated, perhaps this variable will be increasingly marginal in its effects.


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