Six months ago I wrote a column warning investors not to be swayed by the allure of so-called star managers who become famous for what is often fleeting outperformance. It would now appear that my warning was justified and just possibly the cult of star managers is drawing to a close as previous high profile individuals struggle in the current volatile markets.
Granted there are a handful of managers that have delivered consistent above-average returns for investors over a long period of time. But for the most part, star fund managers are created by slick marketing departments and are often as robust as the posters upon which their faces are liberally plastered.
The (statistical) fact of the matter is that the genuine stars of the fund management world run just a handful of funds in a universe of over two thousand. The vast majority of fund managers have been proven to be perennial underperformers, benchmark huggers or poor stock pickers. Most cannot beat their benchmark, but enjoy an annual management fee well above the typical tracker fund (which more often than not will deliver a superior return).
Some managers – most so-called stars in fact – become famous for what is often a short period outperformance. And it is frequently far from clear whether that performance is attributable to the skill of the manager or the general performance of the area in which they invest.
The most obvious example of where we have seen this is at New Star Asset Management. The company built its reputation on the abilities of individual fund managers and promoted them heavily to the outside world. The strategy worked brilliantly while markets were rising and New Star quickly became a leading name in UK fund management.
Things haven’t gone so well recently though and the reputations of many of the managers so heavily promoted have become tarnished – to the extent that investors are reportedly withdrawing their money at an alarming rate and the business is looking for a buyer.
My concern, as you may have gathered, is not for the fund managers in all this but the thousands of investors who bought into the star concept pushed by New Star and others.
In my experience very few investors buy the star manager argument, they have it forced on them by peoples whose interests are not necessarily aligned to theirs. In all my years of advising I have never had a client who insisted on investing with a particular fund manager. I am not sure whether this is unusual, nor can I say that the star fund manager culture has come to an overdue end – I suspect not.
The marketers and star spotters will see to that. But plunging markets have certainly dispelled a few myths – and fatally undermined a few reputations – and I hope demonstrated that wishing on a star is simply no way to invest your money.