Fund manager movements

But what happens if they suddenly decide to leave? For fund management houses that have spent thousands of pounds and countless hours promoting their new charges, it can mean acute embarrassment and a dramatic drop in performance.

Take the example of Neil Pegrum. Less than 18 months after joining Insight Investment to launch the UK Dynamic Fund, he announced he was packing his bags and moving to rival Cazenove. The news came as a devastating blow.

The renowned stock picker, who made his name as a UK equity manager with M&G, was such a success that Insight decided to close the fund rather than pass the mandate onto someone else.

The statistics bear testimony to his achievements. According to Standard & Poor’s, the fund delivered a bid-to-bid return of 79.96%, compared to the 27.22% average for the UK All Companies sector, between its launch in January 2003 and April 1^st 2004 – a few weeks before his departure.

Unsurprisingly, this performance was enough to clinch the top spot over 283 rivals.

The decision to shut UK Dynamic wasn’t made lightly, maintains David Norman, managing director, business partnerships, but it was felt Pegrum was such an “exceptional talent” that replacing him wouldn’t be a realistic option.

“If we changed the team and tried to take that record forward it would be misleading because everyone knows it is Neil’s record,” concedes Norman who believes the whole episode illustrates the pros and cons of recruiting a recognised name.

“The impact of a star fund manager is great because they generate a huge amount of positive PR but the downside is the negative publicity should they leave as it raises questions in people’s minds,” he explains. “It was frustrating because we had spent a year introducing him to people and had seen volumes really picking up after his 12 month anniversary.”

While Insight’s reaction may be rather extreme, there is certainly no shortage of managers penning letters of resignation. Around 50 have switched jobs over the past year, according to broker Bestinvest, with 20 moving since the start of 2004.

“It doesn’t matter what you do there will always be someone there with a bigger chequebook,” remarked one senior investment figure. “It’s fair to say some of these big money deals are a bit irrational. If you’re paying someone Ł3m-a-year then they’ve got to add an awful lot of value to your proposition.”

One of the most shocking examples of performance crumbling before investors’ eyes was the special situations fund from Solus. Under the leadership of Nigel Thomas it became one of the high-flying offerings of the late 1990s.

From January 1996 until he relinquished control in February 2001, the fund delivered an astonishing bid-to-bid return of 355.07%, compared to the 96.99% average, according to Standard & Poor’s. This made it the top performer out of 148 rivals in the UK All Companies sector.

-57.55% was delivered between March 5^th 2001 and March 3^rd 2003, compared to the sector average of -36.22% meant the fund sunk to 232^nd out of 234 competitors.

“It was an incredibly popular fund under Nigel Thomas but after his departure the performance went downhill,” says Juliet Schooling, head of research at Chelsea Financial Services. “It’s a bit of a poisoned chalice taking over from someone like Thomas as there’s only one way to go – down. He was an excellent stock picking fund manager but his process was very much based around him rather than a team.”

However, Solus, which is part of Brown Shipley, is unlikely to suffer in the same way again. Eighteen months ago an investment policy committee was formed to provide a consistent framework as guidance for individual managers.

The IPC, which is made up of seven specialists including industry legend David Rough, overseas all investment decisions and maintains an actively managed list of preferred holdings.

“We’ve found over the past 18 months that there’s a lot more to be gained from having a committee-style approach than fund managers being left to their own devices,” says Peter Collier, business strategy director. “If a manager leaves it’s easier to pick up where he left off.”

It’s not just moving to a rival house which has proved to be a popular trend. A number of managers have decided to shun the ethos of large investment houses completely in favour of branching out on their own or joining up with small boutique operations in which their opinions are likely to carry far more weight.

They may also have a share of the equity, points out Anna Bowes, investments manager at Chase de Vere financial solutions, which can mean their interests and those of their investors are more closely aligned.

“Generally within boutiques fund managers make the decisions and are able to invest more freely,” she adds. “It means you can have a portfolio run by a fund manager who is able to do what he thinks is right, but it’s really just another way to run money.”

There are, however, negatives. In most cases these operations won’t have access to the back-up of analyst research and investors will be pinning all their hopes on individual names to deliver the performance.

What should investors do?

So what should an investor do if a manager decides to leave? Is it best to sell out immediately and follow them or should they stick with their replacement?

There’s no simple answer, says Mark Dampier, head of research at Hargreaves Lansdown. Different circumstances require different actions.

Dampier cites the example of Jupiter’s Income Trust fund. “When William Littlewood left his replacement was Tony Nutt who was already a top drawer manager with experience of running large funds,” he recalls. “Even so, some intermediaries still advised their clients to sell but he’s been a great success.”

Investors must look at the track record of the individuals concerned, believes Dampier. Plenty of houses may claim to have a team approach, he says, but at the end of the day the person at the top has to make the final decision.

“We have always followed the fund manager,” he adds. “What’s the point of having a 10-year track record if you’ve had half a dozen different managers?” We spend our time ranking the fund manager, looking at their history and analysing their style.”

High profile departures, therefore, don’t always result in abject failure. The Newton Higher Income fund, for example, hasn’t suffered from losing two respected names in Toby Thompson and Clive Beagles over the past seven years.

According to the present incumbent, Tineke Frikkee, the ongoing success is down to Newton ’s strict buy and sell discipline which provides continuity of approach. The fact successors are continually lining up to take over the throne – Frikkee herself has worked on the fund since 1998 – also helps the cause.

Under Thompson the fund was ranked 5^th out of 60 funds between the start of 1997 and the beginning of July 2001, according to Standard & Poor’s. Over this period it delivered a bid-to-bid return of 97.05% compared to the 62.77% average for the UK Equity Income sector.

His successor, Beagles, enjoyed similar success. By the end of his reign at the end of March 2004, the fund was ranked 7^th out of 66 funds after delivering a bid-to-bid return of 7.86%, against the -3.37% sector average.

Investment discipline

“We have a team of 22 analysts providing us with stock ideas so we’re not relying on one or two people,” explains Frikkee. “There’s also a very rigorous investment discipline where every stock we hold must yield more than the FTSE All-share index. When a stock reaches this level it’s sold which takes the emotion out of fund management.”

Other houses, including Fidelity, prefer to grow their own star names and give them the freedom to make their own decisions – even if their performance is under constant scrutiny.

“We train our fund managers up from being analysts so they understand the investment process and don’t usually bring people in from the outside that haven’t previously been with the company,” explains senior fund analyst Alex Tarver.

The fund manager merry-go-round has taught investment houses a powerful lesson. While their arrival can provide a massive boost to the fund’s profile, a sudden departure can leave a damaging legacy.

“There are big risks for companies who pin all their hopes on a star fund manager as they may well leave,” says Bowes at Chase de Vere. “A few years ago houses would be happy to just have the named manager, but now they’re keen to emphasis the team approach.”