LONDON (Reuters) - Neil Woodford’s surprise announcement last week of his planned departure from fund manager Invesco Perpetual neatly encapsulates the risks to fund firms who employ such star managers and the investors who back them.
They can leave.
Woodford, widely feted for a defensive stock-picking style that made money throughout the financial crisis, is responsible for running around 30 billion pounds of assets, out of the firm’s 70 billion total.
His 25-year career made him one of the best known money managers among Britain’s private investors. Yet for the fund firms who employ such individuals, there are clear risks of becoming over-dependent on their presence.
Fund firms have spent years trying to reduce the so-called “key man risk”, where the fortunes of a company are tied to the abilities of a single employee. Yet the appeal of well-known individuals to retail investors remains strong, particularly given the unpredictable market conditions heralded by the financial crisis of 2007-2008.
After finding they had paid premium-rate fees for funds that failed to shine in tough times, many have taken to backing a handful of high-profile names who are able to demonstrate consistent outperformance.
“The key thing since the financial crisis (is that) we’ve had an extreme period of focus on some real star managers and money had flowed quite heavily into some funds and made them huge,” said Adrian Lowcock, a senior manager at investment supermarket Hargreaves Lansdown (HRGV.L).
Last week’s shock departure of Woodford therefore sounded alarm bells for firms employing high-flying managers who have become brands in their own right capable of drawing in large volumes of new business.
At the back of people’s minds may be events at Gartmore in 2011, when the departure of top managers such as Roger Guy was quickly followed by the loss of hefty amounts of client cash.
Yet many experts say freefalling returns during the financial crisis demonstrated that hardly any managers could consistently outperform the broader market. This lent weight to the idea that money is better placed in a cheaper-to-run fund that merely tracks the market.
But many investors still set aside a proportion for the “premium” services of star managers.
According to Lipper, which tracks the investment industry, actively-managed funds in its European equity sectors drew in net inflows equivalent to 3.7 percent of assets in the nine months to September 30, while “passive” funds attracted 7 percent.
That trend has significant implications for the industry.
The charge for the average tracker fund (weighted by funds under management) was 0.53 percent at end-August, Investment Management Association data showed. The equivalent for actively managed funds was 1.45 percent, almost three times higher.
The stampede into index and other such passively-managed funds has therefore added to the importance of star managers able to still attract funds, says John Ions, chief executive of UK fund management firm Liontrust.
“Clients will put 70 or 80 percent of their funds into index stuff and the 20 percent they look for outperformance with, they are going to pay for,” Ions told Reuters.
Ions once pioneered a Societe Generale Asset Management UK marketing campaign that highlighted fund manager personalities, making the faces of Nicola Horlick, Peter Seabrook, John Richards and Alan Torry familiar to London commuters in the 1990s as they loomed large on billboard advertisements.
“The whole purpose of the photos was to say ‘look, this is the person who will be running your money,’ for people who said ‘I won’t buy it until I can look into their eyes,'” Ions said.
While fund management moved away from personality-focused marketing in the 2000s, the emergence of industry legends who have survived and even thrived during the financial crisis has brought the fashion full circle, Ions says.
While some fund firms embrace the “star manager” culture for its ability to attract new clientele despite its obvious flaws, others including Standard Life Investments go to great lengths to minimise key man risk.
“Standard Life Investments does not and never has advocated a star fund manager culture,” said global head of sales Phil Barker. He said SLI took every opportunity to emphasise team approaches to running money and devised succession plans to ensure seamless investor service for when a star manager leaves.
Hargreaves’ Lowcock says it may be impossible to remove the star status from the most successful managers. Their performance reflects strong convictions and individual investment styles, which in turn attracts more money into their funds and boosts their status even further.
“What you are looking for is people with really strong convictions ... and that’s what people find appealing, particularly if it works,” he said. “If you make money for people, they will be grateful and give you more money.”
Addtional reporting by Joel Dimmock Editing by David Holmes