Star v teams: who is managing your money? What Investment looks at the different approaches to fund management

What Investment, March, 2003

Over the past few years, successful performers in the world of fund management have found themselves blessed--or cursed--by the star fund manager tag.

In the US, management houses have revelled in the ability to market their funds on the back of a particularly prosperous manager, but here in the UK fund groups have been more reluctant to trade upon single 'star' names. Not only do they risk offending other managers, but they risk losing customers if a fund manager leaves. Give one staff member credit for a fund's performance and their reputation becomes greater than that of the company itself.

What maketh a star?

If I asked you to name me a star fund manager, I'm sure you'd all have a few names on the tip of your tongue. Whether it's Nigel Thomas at Framlington (formerly of ABN Amro), Theodora Zemek at New Star or Philip Gibbs at Jupiter we all know of fund managers whose very names demand respect. But what exactly is it that sets these managers above the crowd?

Of course, above everything else, a solid performance track record is crucial. Every one of the 'stars' highlighted in this feature is noted for achieving some superlative returns for investors over the long term. But there's more to it than this.

"To me, a 'star fund manager' must have a number of key characteristics," says Rob Page, marketing director of star fund manager exponents New Star Asset Management. "They are individuals who have a proven and demonstrable history of outperformance. It's not just about naming a lead fund manager, it's about one individual who uses his or her own skill to maximise returns based on a unique style of investing. We don't believe that you can pigeonhole an entire management group into a growth, value or GARP [growth at a reasonable price] style--each manager needs to be given the freedom to practice a style of management that suits them. We also don't have one overall set of stocks on a buy list--we don't 'manage money by consensus'."

Those managers that are best at their job are style neutral and follow an all-cap approach agrees Andrew Merricks, partner at Simpson's of Brighton. "I think they produce the best performance when they are not blinkered by restraint& A star manager is one of those rare things we call a stockpicker--they make decisions that computers and other analysts would tell them not to do."

The concept of 'star' fund managers is, of course, one that appeals to the public says Richard Scott, fund manager of the fund-of-funds Exeter Pacific Growth. "In my view, a star is simply someone who stands out at being particularly good at their job--whether they be a musician, footballer or fund manager."

The ability to perform in a bear market is also a key characteristic of a strong manager, says Page. "Almost anyone can outperform in a bull market and there were a number of individuals who were raised to 'star' status who hadn't perhaps earnt their spurs over the long term. The recent bear market was an effective way of weeding out the pretenders from the true 'stars'."

Does the 'star' approach work?

Many hands make light work, too many cooks spoil the broth--there's a plethora of aphorisms that could apply to the issue of star fund managers versus the team approach. But one comment made recently in the national press sums up the argument in favour of the individual very nicely: if you are producing a piece of art, you can't produce a masterpiece with a committee of artists.

Page would agree with this. "It's a misconception that better stock decisions are made by large groups of analysts. Decisions invariably take too long this way and opportunities are often missed. And, even where you have a whole room of people, it's inevitably the one who shouts loudest who makes the decisions."

Action by the Investment Managers Association (IMA) to tighten tip on sector asset allocation rules could, however; spell disaster for many actively managed portfolios.

"Regulations to restrict portfolio construction are not the way forward," says Adrian Shandley, director at Premier Wealth Management. "Before the IMA looks to restrict the ability of genuinely decent managers to add value it should clamp down on those closet trackers that have been consistently fourth quartile."

Top fund managers Hugh Hendry of Odey Continental European and Andrew Green of GAM UK Diversified have already threatened to quit the UK retail market if the IMA insists on tying their investment hands.

The Odey fund and the CAM fund currently breach rigid IMA sector rules relating to asset allocation. Odey Continental European is ranked first out of 108 funds over a three-year period in the European excluding UK sector according to Lipper statistics. The fund should be invested 80 per cent in European equities according to IMA rules but, in order to protect investors from the troubled European markets, Hendry is investing just 45 per cent here with a large proportion of the portfolio being held in cash. The IMA is demanding that Hendry reposition the fund's portfolio.