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The case for backing the tried & trusted fund managers

19 October 2017

FE Trustnet asks industry experts why they prefer to back managers with a proven track record rather than taking a gamble on a new upstart.

By Jonathan Jones,

Reporter, FE Trustnet

Investors should back long-term managers as they are more likely to have a repeatable, proven investment process, patience and have experienced a full business cycle, according to several market commentators.

Last week, FE Trustnet looked at the reasons investors might wish to back the new upstart managers, but this comes with risks.

Adrian Lowcock, investment director at Architas, said: “There are new managers that have that potential to be the next [FE Alpha Manager Neil] Woodford but the trouble is it is very hard to get because you don’t have any evidence.

“Because most managers are now media trained and say the right things it is much harder to separate so I think the challenge for the industry is how you look beyond for those managers.”

As such, below we consider the benefits of backing a long-term manager with a proven track record. It should be remembered that, as ever, past performance is no guarantee of future gains.

AJ Bell head of fund selection Ryan Hughes said investors should pay more attention to a manager’s investment philosophy and process, which is essentially what you are backing when investing in a fund.

“The problem we all have is how do we know this investment approach is going to work? What looks good on paper might not work in practice,” he noted.

“As a result, we have to rely on evidence of the effective implementation of the investment strategy and this means looking at a manager’s experience.”

Hughes (pictured) argued that one of the keys of successful fund managers is having a repeatable investment process which can only be proven over a longer time period.

“Managers with long experience give us comfort that they understand how to invest and importantly they are more likely not to be derailed by certain events be they macro-economic or company specific,” he added.

“While looking at experienced managers is not a guarantee of success but it helps separate the skilful from the lucky.”

Indeed, the head of fund selection said new managers may get out to a good start through luck but that this is almost impossible to maintain over the longer term.

As such, managers exhibiting consistently strong performance over a long period should be seen as people that have proven to be skilful rather than lucky.


One such manager he is backing over the longer term is FE Alpha Manager Richard Pease who runs the five FE Crown-rated Crux European Special Situations fund.

The £1.9bn fund has been a top quartile performer over both three and five-year periods and since its launch in 2009 is the third best performer in the IA Europe ex UK sector, returning 191.63 per cent.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

“This fund focuses on good quality businesses, with strong free cashflow that are run by managers that have a proven track record of success,” Hughes said.

“With such a large element on the judgement of what makes a good business and management team, Richard’s experience is key here as he has over 30 years’ experience and knows many management teams inside out.

“To judge Richard’s ability takes time and a strong understanding of the risks involved and an acceptance that at various times, the fund may perform very differently to the benchmark. However, those that have taken the time to understand Richard’s approach have been very well rewarded.”

As well as experience, long-tenured managers also have built up a tolerance for different market conditions as well as the conviction to turn over their portfolios when necessary, according to Liontrust’s John Husselbee.

The head of multi asset said: “Theory suggests that investment management is a zero-sum game with the half of fund managers that outperform offset by the other half that underperform.

“If you also factor in the fees for managing, administering and safekeeping assets, then the universe of outperforming managers is further reduced. This goes a long way to explain the challenges of outperforming year in, year out.

“This is not sustainable over the long term without a high degree of turnover, which in itself creates additional fees,” Husselbee added. “The way to succeed is to set long-term performance expectations and then consistently apply a robust investment process.”

An example of this type of manager is FE Alpha Manager Nick Train, who runs the five crown-rated Lindsell Train Global Equity fund.

Known for his high conviction approach, the manager does not turn over the £3.2bn portfolio drastically as he believes once the initial long-term analysis is complete then the positions should outperform over longer time frames unless something fundamentally changes.


“Train has these characteristics in remaining true to his investment style and approach for example,” he said.

“He runs a concentrated portfolio investing long-term in quality and, in most cases, well-known brands that the manager believes are undervalued. Using funds that maintain their approach over the long term makes the challenge of portfolio construction just that little bit easier.”

Performance of fund vs sector since launch

 

Source: FE Analytics

Since its launch in 2011, the fund has returned 203.11 per cent, more than double the IA Global sector average and the third highest returns in the sector.

However, while experience and a strong and proven process is important, Architas’ Lowcock noted that investors should remain diligent before making an investment decision, as backing a long-term manager also has its risks.

“The short answer is you prefer older managers because you like the track record and are likely to come in for less criticism if you back a proven manager,” he said.

“It is not a straightforward done deal though because managers can’t operate in isolation – they need good governance and good controls in place to support and protect them from themselves to a certain extent.

“I think you have to be careful because even with a track record it can be deceptive so you do need to know you are buying a manager with a proven track record,” explained Lowcock.

“There have been managers in the past who have excellent track record but actually they just did a very good job in the early years.

“Experience isn’t a solution to everything but who would I rather trust – someone who has been through an economic cycle and knows what a recession looks like? Probably.”

He added that while some managers have been known to lose their way, a long-term manager should understand why they have gone through tough periods and should have the strength to back their philosophy in the long run.

For example, while value is out of favour currently he said that managers such as Tom Dobell at M&G and Nick Kirrage and Kevin Murphy at Schroders are good examples of sticking to their process.

“Value is out of favour but I do not want to see a value manager become a growth investor,” said Lowcock. “Managers need that balance between understanding why they are going through different periods and understanding whether they should ever do anything about it.

“Sometimes the answer is no, even it means longer underperformance, because of the nature of the fund and the way they run it.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.