Every week brings news of fund manager changes and an inevitable raft of comment from IFAs and others.
Some will say that there is nothing to be concerned about. There is a good team, there is a process at the investment house. Other fund manager departures will lead to funds being placed on a “watch” list.
There was a well argued editorial in the Evening Standard saying that it was nothing to worry about since most fund managers make no difference anyway – they are kept in a tight box by their house strategy and the most relevant factor is the trading costs they incur in trying to outperform
It is indeed hard to know what to make of it all. I rem-ember a few years ago being told that long-term past performance was almost completely irrelevant because virtually every fund manager had undergone a complete change in their “house philosophy” over the last five years.
When you add to that the number of manager changes, the circumstances that gave rise to the returns more than five years ago had practically no bearing on the present day.
From another quarter, we have the FSA's clear cynicism about the relevance of past performance to the decision-making process and you could be forgiven for wondering if fund manager movement is just another random factor that conspires to produce a given level of performance by nothing more than chance.
Is it possible that there are no “good” managers? That the laws of probability state that most will have no significant runs of good years but that, just as tails can sometimes come up 20 times in a row, so a fund manager will sometimes have enough good years consecutively for people really to bel-ieve that they can repeat it – just at the moment when they go off? Even less frequently, that someone may get such a good run that investors actually make a lot of money?
I do not subscribe to that view. I believe that there are good managers and that you have to stick with them, even if they have a bad year or two.
There are a number of characteristics that mark out good managers but they are not necessarily shared by all managers and do not all need to be present. In fact, some may even be contradictory.
Low portfolio turnover is often a positive sign. This may mean that the manager is confident in their holdings and certainly means low transaction cost friction.
Contrarian approach. Given that the large majority of funds underperform the market, it is safe to say that those who outperform will be doing something different from the herd.
A clear process that you buy into. This sometimes app-lies to a whole investment house as much as an individual manager.
Stability of the investment house. If a company is neither up for sale nor undertaking a merger or takeover, the manager can get on with the business of making money.
Fund manager freedom. This means not being tied to a process and structure that guarantees slightly sub-market performance.
Fund manager identification with the fund. My fav-ourite. Where the manager has a significant proportion of their personal wealth invested in their own fund.
Fund manager moves may not all be significant but some are highly so. Fund managers can make a difference and should be backed through thick and thin, as the thick will always come out on top in their cases.
The fact is that past performance may not generally be persistent but when it is it has the power to make you a lot of money over the long term. The managers who make it happen need to be sought out, supported and followed if they move.
Daniel Godfrey is director general of the Association of Investment Trust Companies