How important is fund manager tenure?

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New research suggests investors prefer fund managers who have a long tenure on the fund, and that consistency behind the management has a direct impact on asset flows. So how can asset managers maintain continuity and prevent outflows when long-running managers leave?

Research from Morningstar found there is a “notable relationship” between fund flows and the tenure of manager on the fund. According to the report: “Investors strongly prefer long-tenured managers and visible continuity of fund management.”

It finds that for UK investors in equity funds, manager tenure has a 0.4 per cent increase in fund flows for every one standard deviation above the average the fund has on manager tenure. For fixed income flows this increases to 0.5 per cent and for balanced fund flows it jumps to 1.5 per cent.

Three years tends to be the minimum length of manager tenure and track record that investors will look for, says Square Mile head of research Victoria Hasler. “That’s when people can then look at the numbers and cut them up in various ways. Before that it’s a bit meaningless.”

The only exception to this would be a very well-renowned manager, such as Neil Woodford, where investors are likely to invest when the manager starts at a new firm and has no track record.

“It’s not even just big name managers, it’s anyone who has moved company but is running a very similar product with very similar resources,” says Hasler. “You have to make sure you’ve got similar support in place, a similar team around them, similar systems, dealing and compliance, even down to things such as product specialists or sales people, because obviously if the money manager doesn’t have that support then they spent a lot of time away from the desk, in which case the track record is not replicable.”

The results could have an impact on the way asset managers structure their fund teams, in order to instil more continuity, or at least give the appearance of continuity.

“Investors strongly prefer long-tenured managers and visible continuity of fund management. Given these results, we anticipate that funds with strong practices of co-management and internal promotion will be better insulated from the adverse effects of manager departures,” says the report.

Lipper UK and Ireland researcher Jake Moeller says there has already been a shift at fund houses from focusing on star managers and towards co-management. For example Richard Plackett, who recently left BlackRock where he managed the UK special situations fund, has been replaced with a team structure, while Aberdeen Asset Management does not name lead fund managers.

“Fund houses will always try to push the line that established and well-resourced processes ensure continuity and protect durable performance. This is a way to mitigate key person risk and safeguard brand goodwill as ambitious and successful managers move on,” he adds.

One recent example where this co-manager structure has been effective in maintaining continuity is in Angus Tulloch stepping down from fund management at Stewart Investors. While he will remain with the firm, he will no longer manage money on a number of his funds. However, the funds have been run in a team structure for some time, meaning the change is not a concern for many investors.

Hasler says: “We’re not actually worried about that change. The person taking over has a similar approach, the team is extremely strong and has got the same input with a very strong team process, so we’re very confident that things will carry on as before and there will not be any changes to philosophy and process.”

However, investors need to be wary about whether a fund is actually co-managed, or if it is really led by one individual. “There are some cases where you very much trust both, both are very capable and if one leaves you’d be happy to carry on in investing,” says Hasler.

But in other cases it is clear one manager has the final say on investment decisions, meaning their departure would negatively impact the fund to a greater degree.

Even in a true co-manager structure the reason it may work is because the two managers complement each other’s skillset, says Hasler.

“You could have a strategic bond fund where one manager is very, very good at macro and one who is really good at credit calls. You would not necessarily keep invested in the fund even though you really rate the manager who is still there.”

There is also the difficulty for asset management firms of convincing investors the fund is truly run by a team, not one well-known individual. Asset managers focus on the process behind fund managers to push this point home.

“One of our pillars of analyst ratings on funds is process. It’s extremely important that fund managers have robust processes for analysis, finding investment opportunities and following the strategy laid out for investors. There is no substitute for that,” says Morningstar senior analyst Warren Miller.

“But that being said there is something to be said for having some tenure. It allows for the fund manager to have seen multiple cycles in the financial markets, in the economy and business cycles and understand how things fit together. It helps a portfolio manager understand how markets work and from a behavioural standpoint to not sell at exactly the wrong time or buy at the wrong time,” he adds.

This is borne out in performance data, compiled by Defaqto. It finds that managers who have run a fund for 10 years or more are more likely to deliver better returns per unit of risk taken than those with tenure of between five and 10 years.

“The reality for active funds is that people manage money not processes and investors invariably associate a fund with a particular individual,” adds Moeller. “Tenure is the test of time and although a fund house, rather than a fund manager, actually owns the performance record, it will invariably be associated with that individual.”