Stick or twist: When to follow a star fund manager

Richard Plackett BlackRock

There has been a spate of star fund manager exits of late, with the news of BlackRock’s Richard Plackett’s retirement last week just the latest in a long line of bombshells for investors. But following Ed Legget’s and Jason Pidcock’s recent moves to Artemis and Jupiter respectively we should remember departures of this kind are simply a fact of life. Neil Woodford, Richard Buxton and Bill Gross are just a few of the other high profile names that have taken the decision to move on in recent years leaving a flurry of uncertainty and apprehension in their wake.

Managers are often turned into “stars” by their own marketing departments, so when one moves on it hits the headlines in a big way. However, all the media noise and excitement often mean that important factors such as the investment process and management team are often overlooked. With this in mind, our advice has always been to avoid getting caught up in the hype and rushing into any hasty decisions about whether to keep money in the fund or not.

According to research, the average fund manager tenure only lasts around 4.5 years. This makes the decision to stick with a fund or follow the manager a fairly familiar dilemma for the majority of investors. Investment mangers have a responsibility to continually monitor and review these situations, particularly as, when changes like this do occur, it can be unsettling for those investors who have based their decision to buy a fund almost entirely on the manager’s track record and performance.

Throw out the rulebook

The fact of the matter is there are no hard and fast rules for what to do when a fund manager leaves and this is why we like to review each departure on an individual basis. It is a common mistake for investors to automatically follow a manager into their new fund because of their track record: this does not always bring success. It is important to remember that there are many variable factors to take into account when looking at an individual case aside from past performance.

When deciding whether or not to sell the fund, one of the most important factors to consider is the actual investment process. It is crucial to establish whether or not the existing investment process will be maintained or changed, as this is will equip you to make a fully informed decision about likely future performance.

Another factor to consider is whether the fund has been managed by a team, not just the star manager, as this will have an impact on strategy and performance. It is also worth identifying who the replacement manager for the fund will be and finding out some details about their history and track record in the industry.

Timing is everything

Should the decision to follow a manager to their new venture be made, the timing of this needs to be carefully considered, as they will often need time to be able to realign the portfolio in order to make it their own. Our view is that it is better to wait a short while before deciding whether to leave or to remain invested. This means waiting until the investment offering is more established under the newly managed fund which, in turn, provides a more accurate insight into the new manager’s style, strategy and performance. At this stage, we also recommend taking account of the tax position of the investment before making a final decision, as well as the potential risk of being excluded from the market while making the transition from one fund to another.

Don’t put all your eggs in one basket

The most logical step to take is to draw up a list of pros and cons to decide whether or not the benefits outweigh the potential costs within the context of the portfolio as a whole. Either way, the most crucial factor driving your decision to follow the manager or remain invested is to maintain a portfolio that is sufficiently diversified between several different managers. This will then help minimise and ensure you against the risk of any one manager departure in the future.

Chris Mayo is investment director at Wellian Investment Solutions