With the difficulties faced by Neil Woodford still fresh in many investors; minds, the announcement that FE Alpha Manager Alexander Darwall is to launch his own firm – Devon Equity Management –came as something of a surprise. 
But investors should beware, said AJ Bell personal finance analyst Laura Suter, who highlighted the spotty track records of some managers who have left the firms where they became established stars.
Indeed, following a manager in this way can come back to bite the investor, according to Suter who has been looking into the pattern of previously highly successful and outperforming managers falling from grace once they strike out on their own.
“Many investors will immediately rush to follow a successful fund manager when they leave their current employer and strike up on their own, assuming they will keep up their current investment style and outperformance,” she said.
“However, the recent Woodford situation means some are doubting whether they were right to withdraw their money and follow the manager as he struck out alone.”
How former star managers have fared with their new funds
Source: AJ Bell
*performance data as at 28 June 2019
Breaking down the data Suter said that there is evidence that once a manager goes it alone and sets up their own asset management firm they perform worse than they previously did.
While Woodford delivered annualised outperformance of the index of 4.27 per cent during his time at Invesco, said the AJ Bell analyst, this turned into annualised underperformance of 7.24 per cent on the recently gated LF Woodford Equity Income fund.
However, it was worse for the most recently launched vehicle LF Woodford Income Focus, which has underperformed the benchmark annually by 16.1 per cent.
Alongside Woodford’s LF Woodford Income Focus fund she highlights the difficulties faced by former Schroders managers Julie Dean, Tim Russell and Chris Rice at their new firm Sanditon Asset Management.
AJ Bell’s Suter said Dean and Rice had outperformed their relevant indices at Schroders, with Dean making an average annual alpha by 8.91 per cent and Rice by 1.67 per cent.
Once they branched out on their begun underperforming with Dean underperforming the benchmark on an annual basis of 7.77 per cent and Rice by 7.34 per cent.
Yet, Suter acknowledges that this is not always the usual pattern.
Barry Norris previously of Neptune and Richard Pease as examples of managers were two examples of managers able to maintain positive returns once they branched out on their own.
Part of the reason for this trend of previously successfully managers failing to translate that success into their own fund is due to the lack of big house resources and analysis they give up, according to Suter.
But a bigger problem is to do with the manager’s investment style not being in vogue.
“As always, the data doesn’t tell the whole story. There are lots of factors that can distract a manager when they set up their own business,” said the analyst.
“A big part of the worse performance is the fund manager’s style being out of favour in the years after they move.”
Suter added: “It’s logical that a fund manager would strike out on their own after a period of outperformance and their investment style being in favour – no investor is likely to follow a manager who has been on a losing streak for years.
“But investment markets change, styles cannot be in favour forever, and investors may find that the fund manager sees markets turn against them once they’ve gone solo.”
Going alone can be fraught with risk, however, and the decisions that managers make are often different to the ones they make when they’re an employee of a larger group, BMO Global Asset Management’s Kelly Prior noted earlier this year.
“Suddenly, it becomes a very different risk,” the multi-manager explained. “Think about it: this is about people making investment decisions and you've got everything to prove.
“They’re thinking ‘what's going to be the best mandate for me to prove that I'm good at my job?’ and you get the opportunity to sit down and design your own mandate.”
She added: “[If] you've got no assets apart from yours and a couple of other investors, you're going to be absolutely committed.”
However, Prior who admires managers who have launched their own firms.
“Usually, the fund managers are the owners of the business, they need this work,” she said. “I think that's an incredibly brave decision. You have to have a huge belief in your own abilities to actually do your job and perform because if you don't, it's your business [that’s affected].”
Yet, when it goes right it can go very right, as can be seen by one of the most successful fund managers to have gone solo in recent years.
Having underperformed whilst managing money at a big fund house, FE Alpha Manager Nick Train has produced the best average annualised alpha of managers included in Suter’s research.
Nick Train’s performance versus his peer group since start of data
Source: FE Analytics
At M&G Global Select, despite all the support and resources Train underperformed the benchmark significantly, according to the analyst.
However, as manager of the five FE Crown-rated £8.7bn LF Lindsell Train Global Equity fund has produced the best annualised alpha return of 7.13 per cent.
“Part of this is that he has been running money at Lindsell Train for far longer than he was at M&G, meaning he has benefitted from investing through different market cycles,” Suter concluded.