Stick or twist? How to know when it’s time to move on
The most damaging relationships are often those that go on too long – and it’s no different with fund managers. Professional investors are keen to extol the virtues of long-term performance, but there comes a time when even the most respected of stock pickers should be cut adrift. When the stock market is strong, as the FTSE 100 has been for the past couple of years, any relative underperformance is thrown into starker relief.
Britain’s best-known manager, Neil Woodford, has suffered a disastrous 12 months. Several of his largest positions have blown up, while investors, both professional and retail, have abandoned his funds in their droves. On the fourth anniversary of the launch of his eponymous investment management company, the flagship Equity Income fund is about £3bn smaller than its peak of more than £10bn in 2017.
While investors who entrusted cash to Mr Woodford at the fund’s launch have not lost money, over the past year they have endured dramatically worse performance than that of the wider market and rival managers. The Equity Income fund has fallen by nearly 10pc in 12 months, during which time the wider group of managers has gained around 7pc and the FTSE 100 has risen by more than 9pc (all figures are total returns).
Supporters point to his track record after previous periods of underperformance, most notably after the bursting of the dotcom bubble.
Neither is Mr Woodford alone. Other enormous funds, including the £19bn Standard Life Gars, and feted managers such as Invesco Perpetual’s Mark Barnett and Fidelity’s Michael Clark have also disappointed investors.
So how long should you wait before switching fund managers?
Brian Dennehy of Fundexpert, an investment shop, said only a tiny minority of funds could consistently be among the top performers over time.
He said: “Patience does not rescue you from this fact – it merely means that, like the stopped clock, from time to time the fund might do well. But as a long-term investment strategy patience is a recipe for mediocrity. Those who insist they have succeeded by investing and forgetting are not skilful but lucky.”
Mr Dennehy identified a number of “red flags” that investors should be aware of both when selecting a fund and reviewing it. These included managers repeatedly explaining their underperformance by claiming that “the market is wrong”.
Jason Hollands of Tilney, a wealth manager, said deciding when to ditch a manager should not be a “mechanical” process but a subjective evaluation of why performance had lagged. Poor returns could have been caused by the manager’s investment style, such as a favouring of “growth” or “value” stocks, being out of step with market conditions, he said.
But he indicated there were some telltale signs that a manager might be on the wane. One was an increasing alignment to the benchmark – the index the fund is measured against. This could indicate that the manager “has lost confidence in their approach”. Other triggers to review a manager include the effect on strategy of a rapid growth in the size of a fund and any changes in the support available to the manager.
“At larger firms in particular there can be an army of analysts, strategists, risk managers and dealers in the background helping to deliver returns,” Mr Hollands said.
“Managers who leap from big houses to small ‘boutiques’ can sink or swim – some struggle to thrive in a leaner environment.”
Neil Woodford, the high-profile fund manager, has suffered a torrid 12 months