Outflows testify to power of stars

Ever since marketeers began pushing the concept of star fund managers, the risk of mass outflows if these people leave has rocketed.

As revenues are also linked to asset levels, investors withdrawing money when managers depart can have a detrimental impact on firms.

Anthony Bolton’s retirement from Fidelity’s £6 billion Special Situations portfolio in 2006 sparked outflows as the group split the fund and gave a global mandate to Jorma Korhonen.

From £3 billion at handover, Global Special Situations stands at £1.7 billion, meaning that, allowing for market deterioration, about £1 billion has flowed out. While larger groups can cope with outflows on particular funds, departures at boutiques can destabilise the entire firm. (article continues below)

Following the resignation of Jeremy Lang and William Pattisson from Liontrust in January 2009, the group’s assets fell sharply. From £4.7 billion under management in March 2008, this had more than halved to £1.9 billion 12 months later and hit £1.1 billion this year.

In its latest results, Liontrust reported £77m outflows in the second quarter with £33m coming in, suggesting assets have settled at about £1 billion.

Jon Ions, installed as the group’s chief executive earlier this year, says assets were falling as a result of underperformance before the managers left. “When I joined in April, the key requirement was to publicise strong performance across Liontrust’s three teams, basically through re-engaging with clients.”

They have rebranded the firm and launched an advertising campaign, with activity resulting in the first net inflows since September 2008 in July.

John Ions
John Ions

As a further measure, Liontrust decided to close its global equity desk before it launched products.

“The team joined in the aftermath of Lang and Pattisson leaving and we could see no clear route to market in the crowded global equity space,” adds Ions.

Meanwhile, the firm is also restructuring remuneration packages to realign the firm’s interests with those of shareholders. With Gary West and James Inglis-Jones running the flagship First Income fund, for example, the group bought out their stakes in Liontrust European Investment Services, a subsidiary firm.

This was only if they invested half the money back into Liontrust, making them significant shareholders in the business, according to Ions.

Gartmore became another outflow casualty, in the wake of the suspension, reinstatement and eventual resignation of Guillaume Rambourg, a European manager, for breaching internal rules on directing trades. Alongside Roger Guy, Rambourg was responsible for just under 40% of Gartmore’s assets in long-only and long-short European equity portfolios.

Despite increasing revenues over the first half of 2010, the group’s assets declined 10% to £19.9 billion during this period, with half of this attributed to outflows. Jeff Meyer, the chief executive officer, says net sales were below expectations, mainly because of the Rambourg situation.

Nick Lincoln
Nick Lincoln

Gartmore shares dropped to a low of under £1 from the 220p flotation price, leading several analysts to claim the group is ripe for takeover. That said, most also acknowledge outflows are beginning to taper off, noting improving mutual fund performance, revenues ahead of expectations and a cheap valuation.

Sarah Spikes, an equity analyst at Arden Partners, says key-man risk has depressed market valuations for fund firms in general.

In contrast to wealth managers – where this individual risk is lower – most fund groups tend to trade on lower multiples. While houses cannot completely safeguard against people leaving, many are holding to the team approach line with more conviction than in the past.

That said, recent events throw renewed light on succession planning at groups such as Invesco Perpetual, where Neil Woodford, Paul Causer and Paul Read run most of the assets.

In response, several advisers are moving towards passive investment, removing the need to follow the top managers around.

Nick Lincoln, a director at Values To Vision Financial Planning, says it is dangerous for groups and investors to put so much money in the hands of one or two managers.

“For most clients, just investing in the market though passive products is enough,” he says.