Orbis’s Brocklebank: The problems with star fund managers

There are many ways to manage funds, but the most common approach is to run a “star system”. According to Morningstar data, out of 905 UK-domiciled equity funds, 505 are led by solo fund managers, 314 funds are managed by a duo and 86 are managed by a team of three or more. That means 56 per cent have a single manager at the helm and just 10 per cent have more than two portfolio managers.

Investment firms are typically heavily incentivised to grow assets under management and star managers work extremely well from a marketing perspective. Investors want to know their savings are in safe hands and it’s easier to gain comfort when the manager is an individual with a glittering resume and track-record, particularly if they are photogenic!

While investing with a star manager is reassuring, it may not be best for long-term returns. Like sports stars, some star managers endure while others flame out suddenly. Their success also often acts against them. Investors flock to managers who have achieved great recent returns, but large inflows leave high-performing managers with two bad options.

The first one is to recommend more stocks, either by stretching their research efforts or lowering the bar for investment. The second is to keep the number of stocks steady, but only invest in larger ones that can accommodate more capital. That handicaps the manager’s ability to move the portfolio to the areas of greatest opportunity, which can be costly. After all, market inefficiencies are rare and difficult to uncover, and the pockets of relative value can change dramatically over time.

Then there’s the issue of longevity. The average fund manager is approximately 45 years old. At that point they are halfway through their career, whereas an investor in their 20s is only just starting to invest, with their retirement over forty years out. That means that no star fund manager is going to be a “one-stop” solution.

A good succession plan can work in theory, but nurturing an heir is no easy task. The star may appoint a successor, but that person can go untested because—by definition—a star system means there’s only one decision-maker directing client capital. Using a sporting analogy, Luis Suarez’s 31 goals in 33 league games propelled Liverpool FC to within two points of clinching the Premier League title in 2014. He left for Barcelona the next season, but Liverpool appeared to be in good hands, as its young English talent, Daniel Sturridge, scored 21 goals in 29 games. Since Suarez’ departure though, Sturridge has notched a mere 16 goals in 58 games. Liverpool finished sixth the next season and dropped to eighth the following. Reds fans learned the hard way how disruptive a star’s departure can be.

So, what’s the solution? When it comes to investing, it’s not as simple as putting a few stars together around a table. Great investments require specialisation and bold decisions, which are best made by individuals, not groups working by consensus. For a team approach to be well structured, therefore, it needs to allow individuals to think and act independently, but ideally also enjoy an element of constructive challenge through a peer review process.

This approach of blending the stock picks of a small number of individuals into a single portfolio may be much harder to market but it provides much greater resiliency than a process that is dependent on a single star.

True, multi-decade sustainability, however, requires a means to refresh the starting line-up over time. It’s why some investment houses spend a great deal of time and effort identifying and nurturing the stockpickers of tomorrow within the organisation so that they are ready to step up and run with the baton when the time comes. This work in particular only pays off over the very long-term but we see it as an important, ongoing, part of the service investment houses provide to their clients.

Dan Brocklebank is head of UK at Orbis Investment