Are star fund managers out of fashion?

5th October 2011

Yet as Investors Chronicle reports, the battering markets received during the financial crisis and this summer's volatility have demonstrated that no ‘star' is immune from falls – not even the biggest in the investment world.

In fact, perhaps the best known among the ‘stars' is Fidelity's Anthony Bolton. He is well-known for delivering a return of nearly 3,000%, or three times the return of the FTSE All-Share, when he managed the Fidelity Special Situations fund between 1979 and 2007.

Yet now he is running the Fidelity China Special Situations fund, his star isn't shining quite so brightly. Shares in his investment trust have hit a fresh all-time low, reports Citywire, dropping 3p, or 4%, to 68.5p in late morning trading, after touching a record trough of 68p.

However, in his defence, Ewan Lovett-Turner, investment companies analyst at Numis, says in the report, that there was ‘no way' Bolton could have avoided the market volatility, even given his great track record. ‘I think it's difficult not to back him again over the long term; you'd hope he'd be able to add some value in the way that he has in the past.'

The fact is that sometimes the nature of being a ‘star' manager can amplify bad performance, as investors leave en masse as a result of bad news, so being named a ‘star fund manager' can be a double-edged sword.

But what makes a ‘star' fund manager?

Asking contacts and searching the internet provides no specific definition of the term. In practice, it appears to be those who have simply delivered a period (unquantifiable) of stellar returns, and have the suitable appearance and ability to produce coherent prose for the media spotlight.

Of course, when it comes to choosing a fund to invest in, investors want to know that the person in charge has the credentials to make their money grow – despite being in a market where nobody knows what might happen next. Some put their faith in fund managers who are in the news because the "stars" are putting their names on the line, so arguably have a greater incentive to perform well over time.

As This is Money reports, we all know of the existing star managers, such as Anthony Bolton and Neil Woodford, who remain popular with investors, offering the combination of a well-known name and an excellent past track record.

But while their stars can burn brightly, they can also be brief.

The cult of the star may be media-driven, but the impact on performance can be real enough if things go wrong. For example, will Sanjeev Shah, who was chosen by Bolton to take over the Fidelity Special Situations fund, repeat Bolton's impressive performance in the future? Who knows – he's dealing with an extremely difficult market.

The cult of the star fund manager has been dented

The financial crisis and stock market turmoil is seeing the ‘star fund manager' trend lose its sheen.

After all, a number of fund managers who were top performers have chalked up some of the worst results over the past few years, and anyway, all fund managers eventually retire or move onto new projects and their successor might not be up to scratch.

So what really matters? Research and a strong team

While it can help in the marketing process to have a ‘big name' associated with an investment fund, surely what really matters is the level of resources available to supply research and analysis?

As the number of star fund managers has fallen in recent years, perhaps fund management groups realise it makes sense to focus on the importance of a team approach to research and management within a fund.

After all, the average tenure of a fund manager only around two and a half years. If crisis hits without the ‘star' at the helm, performance could be impaired if the fund relies on this person.

While leaders are important, teams and processes are equally valuable when selecting investment funds.

On the very notion of a ‘star fund manager', Kim Stephenson, Mindful Money's psychologist blogger, says: "It's twaddle.  People can't tell luck from performance, and the system works to reward results, rather than analysis of risk/reward (because nobody can tell what the risk really is beforehand). The other problem is that afterwards, everybody suffers from "hindsight bias" and thinks they understand what happened and why, when all they know is what the result was. And the system encourages the "star syndrome"

"Maybe the person was lucky – after all, with lots of bankers and lots of traders, if they all closed their eyes and threw darts at a copy of the FT to pick stock, the law of averages says some of them would do really well. 

"So nobody knows, and there are no stars – or if there are, we don't have any reliable way to tell who are stars and who are lucky, who play the system well or who actually look as good in the future as they look (because we don't view the past accurately) in the past."

More from Mindful Money:

Market crash: The illusion of knowledge

What is driving market volatility?

The 'Safe Haven' Illusion

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