Should I stay or should I go? What should you do if your fund manager jumps ship or gets pushed?

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Should I stay or should I go? What should you do if your fund manager jumps ship or gets pushed?

  • This week the board of the Jupiter UK Growth trust announced potential plans to change its manager following long period of underperformance 
  • The board of Woodford Patient Capital investment trust is also going through a strategic review, which may well see a change in investment manager 
  • Industry experts share their advice on what to do when your manager moves on 

As with any industry, employees come and go within the world of asset management. 

This includes fund and trust portfolio managers, whose departures may be preempted or sudden – and either the manager or company’s decision. 

But unlike most roles, a change in manager has the potential to have a severe knock-on effect on a fund’s reputation and performance, particularly if that manager has maintained a track record with strong results.

This week the board of the £44million Jupiter UK Growth investment trust, which has been managed by Steve Davies since 2016, admitted its strategy is ‘not working and needs to be changed’ with one solution being the potential appointment of a new manager.

The Jupiter UK Growth trust has underperformed both its benchmark and sector average return over the past three years - during which time it has been managed by Steve Davies

The Jupiter UK Growth trust has underperformed both its benchmark and sector average return over the past three years – during which time it has been managed by Steve Davies

Sure enough, the trust is down almost 7 per cent over this time, behind the FTSE All Share and its Association of Investment Companies UK All Companies sector average, both of which are up 15 per cent over the same period.

Investment company analysts at Numis Securities said it has been a tough time for Davies since he took over the trust, largely due to the portfolio’s exposure to the UK domestic economy, particularly banks and retailers, and that it is ‘therefore unsurprising to see that the board is seeking to address the underperformance’.

Sam Murphy of Numis said: ‘It is always difficult for a board to assess when is the right time to make a change in manager, as investment styles invariably come in and out of favour, and it is always tempting to give up on an underperforming strategy/manager just before a recovery. 

‘We acknowledge that there have been significant style headwinds for the manager and there is always scope for these to reverse, but we can understand the board making changes, particularly given a number of stock specific issues, such as Sirius Minerals and Thomas Cook.’ 

In this case, poor performance has been the trigger for a potential manager change. However, a better offer elsewhere (including jumping ship to set up their own business) or a long-planned retirement are other common causes for a departure.   

Where the latter takes place, it is usually the case that a succession plan will have been put in place, potentially years ahead. This often involves the appointment of a co-manager and, when well executed, can lead to a seamless handover with very little change in approach.  

But what does it mean for you when a manager is due to stop managing a fund or trust you have invested in sooner rather than later and what should you do?

Avoid knee-jerk reactions  

First of all, it is important to review whether or not to stay put or consider shifting elsewhere. Jason Hollands of Tilney Bestinvest emphasises that this should be done in a calm and orderly way, rather than as a knee-jerk reaction to news.  

‘There will usually be a handover process that can take months, so the impact of any changes to a portfolio that might arise from a manager change will take time to filter through and rarely result in an overnight transformation or change in performance,’ he says.

‘The underlying performance of a fund will be driven by the choice of investments it holds, and these are unlikely to see their share prices move as a result of a change in personnel at one of their shareholders.’

Annabel Brodie-Smith of the Association of Investment Companies, adds: ‘It’s best to take your time to do your research, so you can understand why the change has taken place before you rush to buy or sell. 

‘For example, the new manager could have a strong performance record and be well equipped to fulfill the investment objective. A departing fund manager could have been working with a capable deputy for many years who knows the strategy well, or the manager could have been part of a team, which suggests the approach won’t change too much.’

However Andrew Hardy, co-head of research and portfolio manager at Momentum Global Investment Management, said it can still be valuable to plan in advance for different eventualities, in particular by having back-ups identified for different portfolio holdings. 

He says: ‘If an investor has a substitute fund already in mind for that part of their portfolio, it becomes a much easier and faster decision to switch to that holding if further developments warrant it.’

Ben Yearsley, director at Shore Financial Planning, says there are no real time constraints when it comes to making a decision to sell (or buy more) following a manager departure

Ben Yearsley, director at Shore Financial Planning, says there are no real time constraints when it comes to making a decision to sell (or buy more) following a manager departure

Does timing matter?

After you’ve assessed your portfolio and decided to sell up, you might be wondering when the best time would be. Unfortunately, nobody can time the market and the same applies here.

Ben Yearsley, director at Shore Financial Planning, says there are no real time constraints when it comes to making a decision to sell (or buy more) following a manager departure. 

‘It’s not the case that if you don’t sell by such and such a date you can’t then access your money. With both open and closed end funds you can sell whenever you want (apart from Woodford Equity Income at the moment).

‘As you can’t predict the future investment you never know if you are doing the right or wrong thing if you sell and move to another fund until you look back a few years later. I’ve had situations where I’ve both stuck with a new fund manager with certain funds, and others where I have sold immediately and found a replacement.’

This year, Yearsley sold his holding in the Jupiter European fund after Alexander Darwall stepped down to focus on the trust, and then eventually announced plans to leave the firm. 

However he is sticking with his holding in the Artemis US Extended Alpha fund despite the departure of Stephen Moore as the fund has a team-based approach and so the impact is likely to be minimal.  

Consider key-man risk 

Co-manager and team-based structures are becoming more commonplace in the asset management industry.

This addresses the potential issues associated with key-man risk – that is if a ‘star’ manager who has enjoyed time in the limelight leaves, the risk is the fund will suffer. 

Hollands says a cynic would say this is to provide a little more ‘wriggle room in claiming continuity’ if one of the managers departs but ultimately, like Yearsley, he believes most funds rely on more than the skills of a single ‘trigger puller’ to deliver performance.

‘This is where an expert wealth manager should add value in being on top of such developments,’ he says. 

‘Behind the scenes there will be research analysts, strategists, dealers and risk managers. They may not share the glory of the limelight, but they will play a part. 

‘This is why investors should not automatically assume that a high profile fund manager who leaves a major investment company to go to a small firm – or sets up on their own – will automatically be able to replicate their past success.’

One of the most prominent examples of this in recent years is that of Neil Woodford, who left Invesco in 2014 to set up Woodford Investment Management. Despite years of success, coming top during severe downturns including the global financial crisis, the manager has not seen similar success since going solo.

This year, he was forced to suspend trading on his Woodford Equity Income fund and the board of his Woodford Patient Capital investment trust is currently going through a strategic review – which may well see a change in investment manager for the first time in its history.  

Hollands adds: ‘Even where a past track record appears encouraging, it is important to see whether this was delivered on a fund of similar size. Managers who have run small funds are able to be a lot more flexible than those running much larger portfolios that are harder to move around or which cannot invest in smaller companies.’ 

What about investment trusts?

Jason Hollands of Tilney Bestinvest thinks co-manager structures provide wriggle room in claiming continuity if one manager departs

Jason Hollands of Tilney Bestinvest thinks co-manager structures provide wriggle room in claiming continuity if one manager departs

Investment trusts are closed-ended companies listed on the stock market which investors can buy shares in rather than units directly from the fund manager – as you do with open-ended funds (OEICs). 

As happened to Woodford Equity Income earlier this year, open-ended funds can experience difficulties when investors pull their money out en masse during volatile markets – but this doesn’t occur for managers of investment trusts. They can plan for long-term goals, reducing portfolio turnover and bringing the trading costs down. 

However, trusts are affected by share price movements – particularly once a board has announced to the stock market that it is considering a change in manager.

Charlie Parker, managing director at Albemarle Street Partners, said: ‘A private investor must choose how they respond based on a number of factors. Firstly, they can consider whether they believe the board is acting swiftly to take action and whether they are willing to trust the board to make the right long-term decision. 

‘Secondly, they must consider whether the current share price truly reflects the investment trust’s real value. When an investment trust is not well-supported by the market it can trade at a discount to the value of its own holdings. Selling when the trust is at a discount inherently means selling the underlying assets at less than they are worth. 

‘For this reason if the investor believes that the board is likely to be successful in turning around performance they may choose to wait in the hope that the discount closes and they are able to realise a fuller price in future.’

However, discounts can get worse as well as better, adds Parker. 

‘In instances when the underlying assets within the trust are illiquid – such as is the case for the Woodford Patient Capital – there is a clear risk that the current value of the underlying holdings will fall further and it may be shrewder to head for the exit.’

Stay alert

The most important thing is to keep on top of your investments and look out for announcements of change. 

While very high profile manager changes can hit the news headlines, many changes will occur without fanfare and will only be picked up if you proactively scour fact sheets and reports from fund groups. 

Hollands adds: ‘In particular, with many investors now holding their investments on platforms, there is no obligation to proactively communicate such changes on the thousands of funds available.’

So do your own homework.  

 

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