Long read: Does it really matter if a fund manager leaves?

What of fund management, then? This year has so far been dominated by two-high profile examples of the rule at play: Ben Whitmore’s forthcoming departure from Jupiter, and Mike Riddell’s more abrupt exit from Allianz. 

Plus Peter Rutter has left Royal London to set up on his own and Peter Saacke has left Artemis to become a maths teacher (a career trajectory also being followed by Baillie Gifford's Torcail Stewart).

A glance at Morningstar Direct will tell you that more often than not, the money tends to leave through the fire escape not long after the manager.

But of course managers cannot always be expected to stay with one firm their entire career – or, indeed, be talked out of a sunny retirement on the Riviera after 40 years glued to a Bloomberg terminal. 

And it has become a relatively common refrain that, with names such as Neil Woodford, Richard Buxton, Anthony Bolton and Harry Nimmo leaving the scene, we are no longer living in a world of 'star managers' - though Terry Smith and Nick Train might dispute this.

Naturally the nature of a departure can make all the difference. There’s several types of ‘manager leaving’: poached, fired, retired – that arc more or less resembling the fate of Henry VIII’s wives. 

So we asked several allocators how they feel about it all, and they almost unanimously agree that key-person risk remains of vital importance when deciding whether or not to continue parking client money with the fund. 

But on the other side of the coin, the fund manager’s perspective is entirely different – and so we’ve sat down with one to hear how they manage the transition when a long-standing industry figure departs. 

Starman, waiting in the sky

First, it’s worth discussing whether the once-popular ‘star manager’ term is still relevant to a fund management industry that is more collegiate and resource-driven in nature. 

For Ben Seager-Scott, chief investment officer at Mazars, the era of the individual has had its day.

"The more successful teams will have moved away from a ‘star manager’ approach, which I think is a model that is rightly a thing of the past," he said. 

"Most good fund research teams will have taken the time to understand the broader team, where decision-making really takes place and whether the philosophy, process and culture underpinning the fund has been properly established. In that case, a lead manager leaving on good terms – perhaps retirement – is unlikely to cause disruption and in all likelihood that succession planning will have been well managed."

Mark Preskett, portfolio manager at Morningstar, added that the smaller the team, the greater the key person risk, but that even among larger, well-structured groups, their views on the ultimate decision-maker can make the difference between staying and going. 

"A sudden departure of a key fund manager is typically the catalyst for a sale for us, especially if we don't know who is taking over," he said. "The new manager could be skilled but ultimately there is too much uncertainty, and you are allocating clients’ capital on an unknown." 

Indeed a principal tenet for many fund selectors is ‘knowing what you’re buying’, which is of course violated when somebody new takes the helm. 

And so Preskett agreed with Seager-Scott he would be more likely to hold onto a fund after a well-flagged departure – such as retirement – which gave the fund house more time to come up with a plan rather than an abrupt one.

Shoes to fill

To a certain extent, though, the lead manager does exercise their style over a fund and this is often idiosyncratic – making a strategy difficult to replicate even if the successor wants to. 

Simon Evan-Cook refers to this as the 'unable lieutenant' problem. 

"This occurs when, despite being intelligent, hard-working and well-trained in the process, the founder manager’s successor simply doesn’t have the X factor that made that fund special," he said. 

The Downing multi-asset manager added that a successful founder is often a necessary, but not by themselves sufficient, ingredient to its success. If that ingredient is removed, the chances are that the fund won’t work as well anymore, according to him.

So, what’s the solution? Evan-Cook is inclined to treat the fund as a separate entity and start again anew.

"For this reason, I think that – sadly – a better policy on a manager’s departure is to exit the fund, then judge the new manager from the outside. If they prove themselves to be up to the job, then buy back in."

Despite 'star manager' culture being on the wane, for some allocators there is certainly merit in backing a more individualistic approach to fund management – it enables decisive decision-making, for starters. 

"The lead manager is responsible for the overall investment philosophy and process, but recognises that the team should be able to challenge and debate decisions within the framework of the investment process," said Bevan Blair, chief investment officer at One Four Nine Portfolio Management. 

"Ultimately we like the lead manager to take responsibility for each decision themselves and not hide behind a committee. Bureaucracy can lead to over-diversification, reducing the probability of outperformance," he added. 

Blair himself prefers the wait-and-see approach, taking time to assess what the change means for the fund, without selling from a ‘knee-jerk’ response.

Go with the flows

As our readers know, headlines this year have centred around the fates of three funds in particular: Jupiter Special Situations, JOHCM UK Dynamic and, more recently, Allianz Strategic Bond. 

Paul Angell, head of investment research AJ Bell, pointed out that the commonality between Whitmore and Riddell is that they were simultaneously the architect of the investment process and the head of the investment team. 

He added that it is of particular concern that the businesses had brought in new managers from outside the existing teams to take over, as opposed to appointing deputies. 

And as Asset Allocator has covered recently, the outflows speak for themselves. 

Both Jupiter Special Sits and JOHCM UK Dynamic endured a cruel April – respective outflows totalled £367mn and £266mn over the month.

However significant these leakages, they pale in comparison to those experienced by Allianz Strategic Bond – investors have so far withdrawn over £800mn since the announcement of his departure at the start of the month. 

Of course another significant difference is that the Allianz fund has struggled for some time due to a misplaced duration call by Riddell, while Jupiter Special Sits has performed, by and large, relatively well.

Number crunching

And what does the data say? Well it varies. Since Richard Buxton retired from Jupiter UK Alpha last year there has been a modest drop in performance but not a notable one: the fund has offered fourth quartile returns year to date but in the three of the preceding four years it offered third quartile returns.

The performance of Invesco High Income has gradually improved since Mark Barnett left in 2020 - though it has struggled so far this year. And Liontrust European Dynamic has performed pretty strongly since Rob Burnett left to set up on his own - better than Burnett's new vehicle, Lightman Europe.

But of course there are multiple factors at play here, beyond just the manager, which can influence performance and in some of these cases the manager handed over the reigns to long-standing members of their team.

One of the challenges is the counterfactual: what if the manager had stayed in place? There is one recent occurrance that allows us to test this: Alexander Darwall's departure from Jupiter in 2019 which meant his open-ended fund came under new management while he took his European Opportunities trust with him.

Over the past four years, the two funds have performed remarkably similarly with just two percentage points between them.

But when you zoom out to 10 years, a slightly different picture emerges. Darwall was known for his backing of Germany company Wirecard, which is now insolvent due to a whole host of irregularities which were uncovered by our sister title the Financial Times and which have led to its former chief operating officer listed on Interpol's most wanted.

Darwall's trust was significantly more exposed to this company than his open-ended fund which means it suffered more when the company announced, in June 2020, that €1.9bn in cash was missing.

This meant the European Opportunities Trust didn't recover from Covid at the same speed as the open-ended fund and it shows the impact an individual manager can have. Though in this instance it was the original 'star' manager who made the call.

The fund manager’s perspective

Every departure is idiosyncratic in nature but Asset Allocator thought it worthwhile to sit down with a senior fund manager to discuss the dynamics of taking over a fund when the key person departs. 

Rachel Reutter, co-manager of JOHCM UK Opportunities, joined the team five years before its previous manager, John Wood, retired. He had been in charge of the fund for almost 12 years and led it to more than £1.5bn in size before hanging up the abacus in 2017.

Reutter told us that the transition had been a long time coming and this made for a smooth transition into taking the reins. 

“In many ways, the handover period began on my joining the fund five years earlier,” she said. 

“We had never divided our fund up into specific analyst sector roles, so I was already involved in every stock decision. There was no need for any dramatic changes on day one. The new team was effectively the old team less one person. 

“Neither of us suddenly changed our view on a position as soon as the old lead manager left the building. We had full autonomy from day one, something that I think is essential for every fund manager.”

She added that there was difficulty convincing larger organisations that mandated redemption on a fund manager change. JOHCM experienced chats with clients who didn’t want to sell but who couldn't hold funds removed from the recommended list, according to Reutter. 

So what would she like to see from allocators? 

The UK value manager said that a fresh pair of eyes is no bad thing, and that a renewed openness can yield improved returns.

She also believes it’s worth avoiding ego-driven individualistic styles from the outset, so as to benefit from the different perspectives, balance and challenges that larger teams can employ. 

Finally, a fresh face can offer a feedback opportunity for DFMs to air what they don’t like about the fund, and to engage with new managers who may be more open to change.