What makes star fund managers lose their sparkle?

Fall from grace: Neil Woodford

When a star fund manager moves to pastures new, it’s no surprise they often take a following of loyal investors. After all, people who have seen their money grow once are keen to benefit again. 

Yet, often, no sooner does a star fund manager branch out than they lose their Midas touch. Indeed, the three most pre-eminent fund managers during the 1990s – William Littlewood, Anthony Bolton and Neil Woodford – all massively disappointed in much-hyped new ventures. So why does it all go wrong?

Ryan Hughes is head of active portfolios at investment platform AJ Bell. He believes investment mega-stars often lose their magic when they go on to manage different types of funds to those that made their reputations. ‘Beware if they’re trying to do something different,’ he says. ‘To use a football analogy, it’s a bit like a star striker deciding to try their luck playing at centre back.’ 

William Littlewood achieved returns of over 600 per cent when managing the Jupiter Income fund for ten years during the 1990s – well over twice those achieved by the average equity income fund. 

But a subsequent spell (just completed) at the helm of Artemis Strategic Assets Fund saw him go from hero to virtually zero. During his ten and a half years managing the fund, Artemis Strategic Assets returned 75 per cent – just over half as much as the sector average. 

The downfall may have been as a result of Littlewood’s change of direction. At Artemis, he was no longer managing a predominantly UK equity fund, but a multi-asset fund that generally allowed him to invest in whatever he liked – and to use complex financial instruments such as derivatives to produce extra return. 

Darius McDermott, managing director of investment scrutineer FundCalibre, says: ‘It is certainly a poor record, given Littlewood started in 2009 and we were in a bull market for most of the time he was at the fund’s helm. The core of the fund was supposed to be a UK equity franchise, but he was taking positions against certain market events happening that didn’t. He generally felt government bonds were overvalued globally, but they carried on performing.’ 

Anyone who had invested £1,000 in the Fidelity Special Situations fund when Anthony Bolton started managing it in 1979 would have seen it hit a mind-boggling £147,000 by the time he left in 2007. But the star fund manager came down to earth with a bump when he emerged from retirement in 2010 to manage the more specialist Fidelity China Special Situations investment trust.

The Chinese stock market is notoriously volatile, and the trust did eventually become successful. But during Bolton’s tenure, between April 2010 and March 2014, the trust produced only a six per cent return. 

Neil Woodford’s disasters after setting up Woodford Investment Management in 2014 have been well documented in these pages. But during his previous 25 years at Invesco Perpetual, his UK Equity High Income fund turned £1,000 into more than £23,000. 

His subsequent flagship Woodford Equity Income Fund, which started being wound up in January last year, was ostensibly similar to the one he had been managing at Invesco. But in practice he was investing more heavily in unlisted securities and highly illiquid stocks. 

So, next time a mega-star fund manager moves to pastures new, investors should question whether they are playing to their strengths – or taking on a new challenge where their abilities are unproven. 

Both Woodford, who became his own boss, and Littlewood, who enjoyed an unusually large degree of freedom at Artemis, probably didn’t have their views challenged enough. 

Such autonomy can help foster an unhealthy ‘I always know best’ attitude and a tendency to shout others down, known by psychologists as ‘destructive leadership.’ Matthew Davis, director of The Occupational Psychology Group, says: ‘Destructive leadership from fund managers who give confusing instructions to their team and don’t listen to feedback is worse than no leadership at all.’ 

The factors that influence the success or failure of a fund manager in his or her next venture are nuanced and hard for an ordinary investor to obtain reliable information about. That is why Adrian Lowcock, head of personal investing at fund expert Willis Owen, suggests investors wait to see how a new venture goes before investing their money. 

‘Don’t just follow a fund manager for the sake of it,’ he says. ‘Consider the objectives of the new investment proposition and ask yourself whether you need to rush into buying when there are plenty of other fund managers available. Why not just monitor their performance for a while?’ 

Look, not leap.

This post first appeared on Dailymail.co.uk