Should You Follow When a Fund Manager Exits?

These five star fund managers left a trail of outflows in their wake when they quit. But how does their subsequent performance stack up against their successors'?

David Brenchley 6 August, 2018 | 12:17PM

exit sign, fund managers, star fund manager, neil woodford, richard buxton, fund flows

In an era where passive investment funds are becoming ever-more popular, active fund managers are under scrutiny. Those few that deliver can build up a legion of fans; investors who will entrust their savings to the so-called stars.

And when one of these stalwarts decides to leave their employer in order to take up a role with a rival investment management firm, it provides investors with a dilemma: should they stick, or twist and follow.

There are many factors that must be taken into consideration, including whether their manager will have similar resources at their new place of work; whether the existing fund will be taken over by a member of the existing investment team or an outsider; and if the philosophy of the fund will change. Morningstar analysts consider a fund's process, price, parent, people and performance following a fund manager exit - if any of these elements change it can result in a rating downgrade.

Regardless of whether it is warranted, most star managers leave a trail of outflows on their wake when departing. We analysed Morningstar Direct data, to ascertain whether investors were right to follow the star, or whether they should have stuck with the fund.

Neil Woodford

Probably the biggest fund manager move in the past decade was Neil Woodford’s decision to leave Invesco Perpetual in 2014 in order to set up his own firm, Woodford Investment Management.

Woodford had built up an enviable track record on a number of mandates, including the Morningstar Bronze rated Invesco Perpetual Income fund. In his 26 years managing the fund, Woodford managed to turn a £10,000 lump-sum investment into more than £250,000.

Despite having an heir apparent in Mark Barnett to take over, IP Income subsequently saw ouflows of more than £3 billion in the six months after Woodford announced his departure in October 2013. When he left in March 2014, it lost a further £5 billion, making £8 billion outflows in total. At its peak, IP Income was an £11 billion behemoth. It’s now a shadow of that at around £4 billion.

Woodford raised a record £1.6 billion at the launch of his Bronze Rated Woodford Equity Income fund, which eventually reached the £10 billion mark. Now, though, it has shrunk to just under £6 billion following poor performance.

Both funds in fact have struggled, thanks to poor stock selection – the headline disasters of Provident Financial, Capita and Allied Minds to name a few.

Total returns since Woodford launched his first eponymous fund in June 2014 are extremely similar, with Woodford Equity Income up 21.32% compared to IP Income’s 23.1%. But until June last year, Woodford had significantly outpaced Barnett, with the former up 40% compared to 29% for the latter. Recent poor performance has evened them out.

Were investors right to follow Woodford, then, or should they have stuck around with Barnett? Well, considering the average fund in their Investment Association sector – UK All Companies – has produced gains of 35%, maybe they should have turned to another manager altogether.

Richard Buxton

Another UK equity-focused star manager who left a trail of outflows in his wake is Richard Buxton, whose decision to quit Schroders back in 2013 surprised many. Since announcing his departure, Buxton’s former charge, Schroder UK Alpha Plus, has seen net outflows of £3.35 billion.

Buxton is widely regarded and his track record is impressive. While he only joined Old Mutual in June 2013, he has been running the Old Mutual UK Alpha fund, initially on an outsourced basis, since December 2009. In that time, he’s more than doubled investors’ money.

However, comparing his new fund with his old one reveals a pretty tight race. Since 1 June 2013, Old Mutual UK Alpha has returned 41.55% compared to Schroder UK Alpha Plus’s 41.5%.

Julie Dean

18 months after Buxton headed out of the door, Schroders lost another popular UK-focused fund manager in Julie Dean. Under her 12-year leadership, the Schroder UK Opportunities fund – formerly Cazenove UK Opportunities – turned £10,000 into almost £45,000.

Since she quit to join Sanditon Asset Management, her old fund has lost £1.9 billion in assets. Dean has since begun to run the TM Sanditon UK fund, launched in mid-June 2015.

Until the beginning of 2017, performance of both funds was extremely similar – and rather flat, though that period did take in the UK’s EU referendum – with her new offering just beating the old one 2.4% to 1.9%.

But since the start of 2017, Matt Hudson, the new boss of Schroder UK Opportunities, has overseen a turnaround in performancen. Total returns over the past two years are 16% at Schroders, and 6.5% for the Sanditon fund.

As a result, investors putting their cash back into Hudson’s fund to the tune of £39 million year-to-date.

Jason Pidcock

Jason Pidcock’s Newton Asian Income had trebled investors’ money in the near 10 years he ran it, easily outpacing the IA’s Asia Pacific ex Japan sector average.

Pidcock left to join Jupiter’s Asian team in mid-2015, where he began running the newly launched Jupiter Asian Income fund in March 2016.

The Newton fund, the subsequent running of which was tasked to Zoe Kaan and Robert Marshall-Lee, saw almost £3.5 billion of outflows as a result.

Those investors who followed Pidcock to Jupiter can pat themselves on the back, as his new fund has returned 43.2% since inception, compared to the Newton offering’s 37.5%.

However, the average Asia Pacific ex Japan fund has seen gains of 57%, suggesting better offerings are out there.

Dickie Hodges

Moving away from equity fund managers, Dickie Hodges has forged himself a formidable reputation in fixed income, steering the L&G Dynamic Bond fund to impressive performance. Under his tenure, between inception in April 2007 to September 2014, the fund doubled investors’ cash. That compares to just a 46% return from the average fund in the IA Sterling Strategic Bond sector.

Hodges left Legal & General to join Nomura Asset Management, where he launched a similar mandate but on a global scale in the form of the Nomura Global Dynamic Bond fund.

As well as Hodges, L&G also lost investors, with £1.7 billion withdrawn from his ex-fund’s coffers in the intervening four years.

Clearly, we’re not comparing apples with apples, with UK bond funds lagging global ones. Still, the Nomura fund has returned 8.3% since inception, compared with the L&G offering’s loss of 0.13%.

Both have lagged their respective IA sectors – 16.2% and 10.375 respectively – in that time, though the Nomura fund comes out better on that comparison.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk