Stick or twist? How to know when it’s time to move on

The Sunday Telegraph - Money & Business - - Money - Sam Brod­beck

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

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