Finance

The Woodford debacle has called the concept of 'star' managers into question like never before


The concept of there being ‘star’ fund managers has always been contentious and now it’s positively radioactive due to the Neil Woodford saga.

The broad arguments are well known. Can individual investors truly have a special level of talent that will always be with them, and mean they beat the market in perpetuity?

Or is it simply the case that probabilities dictate if enough managers take enough of an active position versus the underlying market inevitably some will inevitably beat it handily?

It’s good that the existence of star managers encourages people to invest when they otherwise might leave their money in cash, dwindling away slowly due to inflation. 

Neil Woodford's star has fallen dramatically back down to earth.

Neil Woodford’s star has fallen dramatically back down to earth.

The major downside of course as we have seen so dramatically is that unquestioning faith in a star manager’s abilities may lead some to put too many eggs in one basket rather than diversify properly.  

Star managers as a whole are not going to disappear any time soon despite what has occurred over the past couple of weeks. What does seem to be at risk of going away completely is the prospect of any others setting up shop on their own.

There is a lot more to running a fund than the lead manager, and the public have become a lot more aware of this.

There is a team of analysts that do much of the leg work in identifying the stocks to buy or sell, there are compliance and risk management people who rein in the sort of risky moves that have undone Woodford – as well as a CIO or chief exec watching over the managers and a whole host of others that make the whole thing work, from marketing to HR.

To forgo all of this a manager has to be pretty sure they will be able to make a lot more money on their own and continue to beat the market.

It seems unlikely that a fund manager who has achieved the level of index beating returns necessary to contemplate setting up as a one man or woman band would be suffering from much self-doubt.

The real question they will ask themselves now is not whether or not they can keep up the performance that made them successful, but whether enough investors will be prepared to back them in that endeavour in the first place in the wake of Woodford’s fall from grace.

There are considerable costs in time, effort and money involved in setting up an independent fund firm. If a manager fears this may not be well rewarded due to a new-found reluctance among potential investors to back boutique vehicles built around one or two people that will put the kibosh on it.

The backlash Woodford has faced will also put potential firm launchers off.  

While Woodford’s troubles will be the elephant in the room for years to come whenever the subject of star managers is raised, it is fair to say he is the exception rather than the rule and there needs to be some balance in the discourse.

Other stars of the past couple of decades have largely stayed in the ascendancy after rising to prominence rather than crashing down to earth.

The most notable example is Terry Smith. He neither sits within a big fund management house nor broke away from one. He has cut his own investment path since entering the industry after a career in related but different fields.

So far at least though, Smith has just kept on delivering. He is a very different manager to Woodford of course and uses a different style, so is never likely to suffer the same problems. Different trouble possibly, but not a Woodford part two. His emerging markets trust has struggled, but the flagship fund is still sailing along.

Other star fund managers like Terry Smith are still riding high

Other star fund managers like Terry Smith are still riding high

European equities star Richard Pease has so far made a success of a breakaway. 

Despite the distraction of a well-documented legal dispute with former employer Henderson over unpaid management fees which he eventually won, it has been business as usual with his Crux European Special Situations Fund delivering market beating returns since he launched in 2015.

Michael Lindsell and Nick Train are still on track with their two-man outfit as well, with no signs they could come off the rails like Woodford has.

Another interesting case in point is Richard Buxton. The UK equities manager made his at name at Schroders, but rather than set out on his own he took up what was no doubt a very lucrative offer from Old Mutual Global Investors to jump ship.

Then when presented with what appeared to be the opportunity to strike out on his own when the South African parent company decided to sell off OMGI, he elected to stay within the fold of a broad firm, later rebadged as Merian. 

With the hindsight provided by the Woodford saga it seems a shrewd move.

While Buxton’s UK equities fund has not been a stellar performer of late, he hasn’t taken the sort of gambles that Woodford did and is still very much in the game.

A nod should also be made to Anthony Bolton. He managed to rise to star status at Fidelity and stay in the ascendancy. Although he had to split his fund when it became so popular as to make it unwieldy, he consistently beat the market, suffered no calamities and stepped back from day to day fund management still in high standing.  

We will never know what would have happened if Woodford stayed at Invesco, but it seems right to say whatever it was it would have been better than what has befallen him and his many backers.

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