On Investing

Follow the leader

For an investment-related topic worth pondering, I’ve been inspired somewhat by this article on the negative impact of fund manager moves – both from the losing fund house’s and the end-investor’s perspective. Substantial outflows occur; investors missing out on the news of a move are caught out; and those in the know can be confused regarding the best course of action to take. Meanwhile, Woodford Equity Income has swelled to £6.2bn, with Jupiter AM’s Merlin range accounting for almost £1bn of that overall figure.

Some high-profile fund manager moves have evidenced the propensity of both intermediaries and direct investors to follow individuals. These real-life, modern-day Pied Piper of Hamelin figures put money in motion and shake up researchers’ recommended fund lists. Understandably, fund houses are now looking to downplay star quality, and instead emphasise team approach and investment process.

Advisers tell us that fund manager personalities don’t hold sway when they’re selecting funds, and that consistency of team and process matter to them. Yet stated intention and actual behaviour – as any good little researcher knows – often don’t align perfectly. Over 70 per cent of advisers consider three-year rolling averages an important factor when assessing fund performance; commonly a minimum track record of three years is a baseline requirement. But when a ‘star’ manager ups sticks, individual track record can trump all other fund selection criteria. In any case, almost three-fifths of advisers consider individual fund manager track record when assessing fund performance.

It is questionable whether we should revere fund manager track record in the first place. This isn’t something I’d really thought about before, until an adviser pointed out, “I’d rather have Harry Kane in my [football] team than Beckham… It’s taking a bit of a risk because he’s only had half a season, but I’d like the performance of Beckham from a 21-year-old.” Fresh talent is great, but it comes with risks attached.

Does anyone in fact benefit from fund manager upheavals, apart from the individuals themselves? Maybe boutiques do. Managers from the largest fund houses can crop up at smaller outfits – think Julie Dean’s move from Schroders to Sanditon AM. Personally, I quite like this kind of redistribution of talent – it gives the smaller providers a better chance of gaining traction with advisers and perhaps even end-investors.

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On Investing

Platforms: A Euro-Vision of Open Architecture

It’s time to admit to one of my guilty pleasures: the Eurovision Song Contest. The early heats are in full swing, building up to the grand finale at the end of May. In tribute to this auspicious pan-European competition, whose geopolitical point scoring, questionable music picks and tacky ensembles oddly enthrall (some of) us every year, I’ve crafted my own European Open Architecture Contest. The three categories are: Most Open Architecture, Biggest European Platform and Platform of the People – the last being entirely subjective but important all the same. Forgive me for being not as funny but just as dry as Terry Wogan or Graham Norton!

While in recent years the UK has consistently disappointed on the Eurovision stage, I’m pleased to award our island nation the coveted Most Open Architecture award. Often we use the investment platform market to gauge the opportunity for fund managers without – or looking beyond – captive distribution channels. The UK platform market is £331bn (€430bn) according to our data at 30th September 2014, taking into account D2C, adviser and institutional platforms and removing double-counting where possible. For example, we have included the all-encompassing assets under administration figure for Cofunds and left out the figure supplied to us by D2C platform Willis Owen, as Cofunds Institutional is the engine behind it.

This market closest in size to the UK is Switzerland with €283bn, followed by Italy at €265bn and then Germany at €207bn – less than half the size of the UK.

Lipper data supports the UK’s victory in this category. The top five fund managers in the UK commanded a 31 per cent share of the retail fund market collectively at the end of 2014, excluding money market funds, fund-of-funds and ETFs. Having almost a third of the market sewn up by a handful of groups does not sound like a particularly ‘open’ situation; however compare this to Switzerland where the top five accounted for 80 per cent of the market, or in Italy where they were 69 per cent.

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he UK open architecture market currently has around 30 platforms, but none of the home-grown providers have made it big on the European stage (yet). At 30thSeptember 2013, UBS Fondcenter was the big (Swiss) cheese, with AUA of €122bn. A year on and Santander/Intesa Sanpaolo-owned Allfunds has overtaken to win the Biggest European Platform award, with €147bn in assets versus Fondcenter’s €144bn. Strictly speaking, a small proportion of this total is not European – Allfunds has some business in Latin America – but as some other cross-border platform titans don’t provide a country or continental split to us, we’d be remiss to punish the platform for their transparent reporting to us.

The great shame of Eurovision is the discrepancy between who scoops up points and who actually provides entertainment value – Finnish heavy metal band Lordi’s 2006 win being the notable exception. In the European platform arena, it’s the large, ‘serious’ institutional platforms that dominate. So to shine the spotlight on a smaller platform with a big personality, I award IFA and D2C platform Nordnet with the Platform of the People title.

With 371,000 end users across the four Nordic markets at the end of September, Nordnet has better penetration than Hargreaves Lansdown with 653,000 clients – impressive considering the UK population is more than twice that of Sweden, Norway, Finland and Denmark combined. Now that the Swedish regulator will be implementing a full commission ban on investment advice, we also anticipate a future boost in D2C business as some investors shun explicit adviser fees.

Yet the really interesting thing about this platform is how it is trying to encourage consumer engagement, which I first wrote about in February 2014. By acquiring and integrating social investing site Shareville, users now have the option to share the breakdown of their portfolio in percentage terms and transactions real-time, and ‘follow’ the activity of others on the platform. In addition, Nordnet recently launched a suite of four white-labelled index funds with zero management fees to attract new users. The platform makes light of this ‘try before you buy’ strategy in its marketing comms.

So there you have it – a clean contest where political point scoring didn’t feature at all.

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On Investing

Emotional finance and the fund manager focus

You may rate the Woodfords and Buxtons of this world; you may be scornful of the so-called “star managers” and balk at the mention of the “Woodford effect”. But you cannot deny the importance to fund selectors of the manager behind the fund.

We have been tracking the focus on individual managers at The Platforum for about 18 months. In research we conducted last spring, 12 key fund selectors mentioned a total of just 29 names when prompted for leaders in various asset classes and sectors – and 19 of these were individual managers rather than funds or fund houses. No surprises with some of the managers most frequently referenced: Neil Woodford, Nigel Thomas, Richard Buxton, Richard Plackett and Richard Woolnough.

Last month the team and I were out and about again interviewing obliging fund selectors. No hushed tones or code words were used but the Chatham House Rule applied, naturally. Again, the draw of manager track record and process was a factor often emphasised. One selector commented: “It is mainly due to the individual running the fund – consistent track record, their abilities, understanding, etc. Very much a people approach.”

I have long been absorbed by the notion of buying in to a fund manager’s process. Some selectors even say explicitly that they will stand by underperforming managers if they feel they understand and accept the process. This resonates with the growing body of literature I have seen on emotional finance – like behavioural finance, but with feeling. In a world assumed to be ruled by actuarial risk models, Efficient Frontiers, correlation ratios and other things that involve Greek symbols, softer, ‘emotional’ factors probably play a far greater role in fund management than many would admit.

Finally succumbing to Twitter, I stumbled across Sensible Investing TV and then the Fund Managers Uncovered video series based on research undertaken by psychoanalyst David Tuckett and professor of finance and accounting Richard Taffler. In 2007 the pair interviewed 50 fund management heavyweights and found emotion cannot be divorced from  stockpicking. Tuckett and Taffler’s Fund Management: An Emotional Finance Perspective, describes how aspects of investment management invite an emotional response – not least the unrealistic expectation of consistent outperformance.

One section, Stories and Plots, tied in nicely with what we had been hearing from fund selectors about the importance of understanding a fund manager’s process. While we have reported on the connection selectors make when they hear a compelling fund management story, Tucket and Taffler’s analysis centres on the connection the manager makes with his/her stockpicking through storytelling. “[The portfolio managers] are all, in one way or another, using the medium of story to help them maintain the conviction necessary for them to engage in a dependent relationship with stocks in an uncertain world.”

What is increasingly evident in our field is that stories can have more sway than numbers and graphs. Qualitative fund screening is really the clincher for many. Fund managers talk about which stocks they like, or even love, suggesting that their thinking is not all cold, hard logic and those listening can’t help but on some level take in the emotionally-charged language. Increasingly, fund selectors talk about “liked and trusted” managers rather than those who can deliver alpha.

Is it good or bad for us all to be so in touch with our emotions when it comes to finance? Case in point: when Anthony Bolton made the admission earlier this year that he had been “wrong” about the Chinese market, I was reminded of the faithful followers who stuck by his poorly-performing Fidelity China Special Sits fund. They trusted its manager, based on his extraordinary track record running the UK-based Special Sits fund.

Emotional finance also has more fundamental implications. What if the emphasis placed upon the individual manager causes undue pressure, leading to poor decisions? Already, Tuckett and Taffler report on unhealthy “screen gazing”: many fund managers glance at their screens at least daily, despite being able to make changes only monthly. I appreciate why the manager behind the fund is so important and I can understand a good investment story better than a series of graphs. Nevertheless, we perhaps need to be a bit more wary of the emotional element of fund selection as well as follow Tuckett and Taffler’s advice to “explicitly recognise in the fund management industry the contribution the fund manager can realistically make”.

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On Investing

The human face of fund managers

These days the pages of the trade press are awash with stories about individual fund managers. For example, Anthony Bolton and his inability to replicate his Fidelity UK Special Situations success in China, Invesco Perpetual UK equities veteran Neil Woodford, former Schroders star Richard Buxton, Bambos Hambi working his magic for Standard Life’s MyFolio range, and so on. The investment business is becoming increasingly focused on a handful of key individuals.

Recent research by The Platforum with fund selectors in both the direct and advised markets positively underlines the idea of buying people rather than funds or brands. The selectors cite largely individual attributes as important factors considered when they pick funds for multi-manager funds, model portfolios and select lists.

Fund manager tenure in particular is a fundamental piece of the puzzle – they want to assess whether performance is down to skill or luck as well as invest in someone deemed to be trustworthy. Other important human factors include consistency of process, how the manager thinks, and how he/ she responds to risk.

We see consolidation around a handful of managers with a 10-year-plus track record. Asking fund selectors who their top fund managers are, some names get mentioned time and time again: Woodford and Buxton for UK equities and Richard Woolnough at M&G for bonds. The various quantitative and qualitative screening processes adopted by the fund selectors seem to boil down to similar pools of funds and their managers. For example, Woodford’s baby, the Invesco Perpetual High Income fund, currently appears on seven out of nine direct platforms’ select lists that we have  seen; the M&G Optimal Income managed by Woolnough appears on all nine lists.

woodfor_480The strength of influence held by these individuals is evident in the migration of Buxton from Schroders to Old Mutual Global Investors. The UK Alpha fund had about £150m asset under management prior to him taking the helm; a few months on and the fund’s assets exceed £500m. Impressive inflows into OM UK Alpha were matched by flows out of the Schroder UK Alpha Plus fund – at least partly as a result of investors switching with Buxton. The sentiment echoed by several selectors is that “you follow the people, not the brand… if they left, you would go with them.”

And who could blame customers for doing so? Data from FE shows how Buxton’s track record has beaten the market’s, and then some. Over an 11-year period, he has achieved over a 200 per cent total return, versus the FTSE 100’s total return of about 110 per cent.

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As always when the story seems a little too simple, there is a big BUT. Fund selectors may not be so swayed by brand, but they do recognise its importance to advisers and end-investors. Well-established brands offer a degree of reassurance in the very uncertain world of investing. One can also derive comfort from the big brand in a marketplace ever-more focused on risk. We heard the following from one fund selector:

“Why are we all buying Woodford? We still see the importance of brand above manager, especially when creating lists and products for advisers. Advisers may in principle be against a guided fund list, but when prompted shun lesser-known foreign brands for the likes of M&G and Invesco.”

This throws up questions about the relationship between people and brands. It is all a bit chicken and egg – does a fund manager’s star quality light up its parent brand or do the biggest brands attract the best talent?

Untangling the different factors influencing decision-making is always challenging in any kind of field of research. But it stands to reason that the human face behind the fund is, perhaps, the most important factor in investment decisions.

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