Fund managers who strike out alone underperform

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Fund managers tend to perform worse after they’ve set up their own firm, according to AJ Bell.

The investment platform that found six out of the seven well known fund managers who have gone solo have underperformed their previous record.

Neil Woodford (Invesco), Richard Pease (Henderson), Barry Norris (Neptune), Julie Dean (Schroders), Tim Russell (Schroders), and Chris Rice (Schroders), all performed worse after leaving their respective investment companies. Nick Train bucked the trend by outperforming the funds he managed at M&G after moving on.

Laura Suter, personal finance analyst at AJ Bell, said:  “Many investors will immediately rush to follow a successful fund manager when they leave their current employer and strike up on their own, assuming they will keep up their current investment style and outperformance. However, the recent Woodford situation means some are doubting whether they were right to withdraw their money and follow the manager as he struck out alone. The news that Alexander Darwall is leaving Jupiter has raised the question again.”

AJ Bell’s figures show that once a fund manager leaves the comfort of a big fund house and sets up their own asset manager, they perform worse than they did previously.

The Woodford example has been well trodden, but in his previous years at Invesco on the Income fund he delivered annualised ‘alpha’, so outperformance of the index, of 4.3 per cent. Since setting up alone has underperformed the index by an annualised 7.2 per cent.

The trio of managers who set up Sanditon Asset Management (Dean, Russell and Rice) are another example, with Dean and Rice outperforming their relevant indices at Schroders, but significantly underperforming in the following years.

While some fund managers have outperformed the index after going it alone, such as Pease and Norris, they still haven’t managed to generate as much alpha as they did at their previous company.

Suter said: “The only person to buck this trend is Nick Train, who actually underperformed the index on an annualised basis when he ran money at M&G, before having sterling outperformance in the years since. Part of this is that he has been running money at Lindsell Train for far longer than he was at M&G, meaning he has benefitted from investing through different market cycles.”

There are lots of factors that can distract a manager when they set up their own business. Where previously they had the support of large research teams, analysts, sales departments and marketing teams, they now have to operate in a leaner environment.

Suter said: “But you also need to look at the character of a fund manager, and attempt to work out whether they are likely to benefit from some of the controls and checks and balances a larger organisation will put in place.”



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