Over recent years the focus on investment research and fund selection for IFAs when advising on portfolio planning for clients has heightened in intensity and importance.
For investment advisers, asset allocation is the key determinant for the success of any portfolio. The fund manager decides where to invest, and their skill and judgement is what advisory business model IFAs rely upon to deliver the required returns to their clients.
Any robust and in-depth research process should identify the funds and the managers who offer potential to deliver returns to the investor.
A number of factors must be considered when selecting funds, and the ranking of importance of fund management changes, and the impact that they have on fund performance and returns, is part of the overall process. But how important are they?
On this topic, two valuable research documents conducted by the Faculty of Finance at the Cass Business School and Centre for Asset Management entitled Changing Horses in Midstream and The Impact of Fund Manager Changes on Fund Performance contain a wealth of empirical research. The papers draw some very significant conclusions, which are well summarised:
“Manager change does have an impact upon the performance of the fund. Funds that perform well perform less well once the manager changes, while funds that perform poorly tend to perform better or at least less poorly after the manager change.
“Our research adds weight to the idea that fund managers matter. Our results should also serve as a warning to investors: when the fund manager changes expect performance to change too.”
The fund manager, then, has a significant impact, negative or positive, when he either retires, moves company or at worst, dies. The papers examine a number of key areas, including: risk aversion; investment styles; developed markets versus emerging markets; active and passive strategies and fund manager tenure.
The papers also highlight the fact that more data is available for US fund management than in the UK. The conclusions drawn, however, I believe do have strong relevance for the UK retail market, and should be seriously considered.
When a ‘star’ manager changes team colours and leaves behind a fund he has been managing extremely well, advisers have to ask themselves: ‘Do I stay or do I go?’
I am often surprised in conversation with colleagues to hear their varying responses to fund manager changes. The reactions broadly fall into two camps; the first believing that the manager is the maestro and will move client funds to follow the star, while the second group takes a more pragmatic view, keeping faith with the fund as well as the management team and process that have been successfully built up by the outgoing lead manager.
My own view has always been that there is danger in putting too much store on one individual fund manager, and that the other criteria for selecting a fund are equally important deciding factors.
