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.

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”.