Investors abandon star fund managers in 2023 – should you do the same?

For decades, star fund managers like Terry Smith and Nick Train have dominated investors’ portfolios. 

Known for their stock picking expertise, these famous names have grown popular with private and professional investors because of their strong track record for delivering above-average returns. 

But market turbulence has shaken many people’s faith in these highly revered managers. 

So far this year, investors have pulled £754m out of Terry Smith’s £23.8bn flagship fund, Fundsmith Equity, and £486m out of Nick Train’s £4.4bn Lindsell Train UK Equity, according to data from investment research firm Morningstar. 

Rob Burgeman of wealth manager RBC Brewin Dolphin said the dramatic outflows show investors are anxious about whether the fund manager’s strategies, which have struggled to cope in today’s challenging macroeconomic climate, can continue to deliver good returns in the long-term. 

Over the past year, Fundsmith Equity – focused on high-quality companies – has fallen by just under 1pc, according to Morningstar, whereas Lindsell Train UK Equity – invested in many large UK firms – has returned a paltry 0.8pc. 

“The surge in inflation and the resultant rises in global interest rates saw a switch in investor focus, with growth stocks (in general) and quality growth stocks (in particular) underperforming quite dramatically,” Mr Burgeman said. 

But recent underperformance may not be the only reason why investors are turning away from the big-name stockpickers.

Jason Hollands of investment platform Bestinvest said star managers have been losing their shine for the last two decades. 

“There was a time when star managers were feted like pin-striped rock stars, but that is now largely a thing of the past, as the public and media have grown more sceptical towards active management, and professional fund buyers – i.e. wealth managers and multi-managers – have adopted institutional processes that place greater emphasis on scrutinising resourcing, infrastructure and the controls around the manager,” he said.

The Woodford saga was another nail in the coffin, according to Mr Hollands. 

The most notorious of star fund managers, Mr Woodford fell from grace after 300,000 investors lost their savings because of his open-ended Equity Income fund’s exposure to illiquid assets, which meant the fund could not repay investors who wanted to withdraw their money. 

With star fund managers struggling to prove their worth this year, should you stick with the experts who have risen to the top of their industry? 

Are star fund managers more expensive?

Regardless of who the manager is, you can expect to pay more for an actively managed fund than a passive alternative.

Whereas an active manager will generally charge between 0.7pc and 1pc per annum, a passive fund which simply tracks an index like the FTSE 100 may only cost around 0.1pc.

A well-known fund manager can be on the expensive side, although this is not always the case. While Fundsmith Equity carries a 0.94pc fee, the annual charge for Lindsell Train UK Equity is 0.65pc. 

Over time, fees will erode your investment returns. But a higher fee could be worth it if the results are significantly higher than what can be achieved with a simple tracker. 

Do star fund managers perform better? 

Over the long-term, prolific fund managers have tended to outperform their peers. Data from the Association of Investment Companies shows that the funds of well-known stockpickers have in some cases delivered quadruple the returns of the average investment trust. 

For example, Scottish Mortgage, managed by Tom Slater, has delivered 659pc for investors over the past 15 years, while Polar Capital Technology, managed by tech investor Ben Rogoff, has returned 1,179pc. 

This is why one-year returns should be treated with caution, Mr Burgeman said: “Almost no manager is going to be able to outperform in every market condition and chasing this can almost always be counterproductive.” 

However, investors should still look beyond 10-year returns. “A five- or 10-year return may look stellar, but if this was driven by one or two short-term spurts of stellar returns, it may indicate they had a lucky streak,” said Mr Hollands. 

“This is why it is wise to scrutinise performance over a variety of time periods and to view a plot of the fund over time, so you can spot any short periods of sharp deviation from the market they invest in.”

Now read: How to invest like the best (and the strategies to avoid)

What can we learn from the Woodford saga? 

Mr Woodford first made a name for himself at Invesco, managing the Invesco Perpetual Income and Invesco Perpetual High Income funds. 

As Mr Burgeman pointed out, the trouble began when Mr Woodford left the firm where he had established himself to go and set up his own venture. 

“This meant he had fewer controls and restrictions around what he could and couldn’t do and, importantly, also meant he didn’t necessarily have the same support and infrastructure that allowed him to establish his reputation in the first place.”

Ever since the Woodford scandal, wealth managers and other firms have been placing a much greater emphasis on the team that surrounds the star manager in order to dodge what is known as “key person risk” – the damage caused by the loss of a critical individual. 

Jonathan Miller, who is director of manager research at Morningstar, said that in recent years there has been a clearer move away from espousing that a fund is run by a star manager. 

“As part of our qualitative research on funds we need to assess how the fund manager interacts with their team, how decisions are made or shared, whether there is a deputy manager, and how succession planning is thought about,” he said.

“We also look to meet people outside of the lead manager(s) to gain a broader view. Over the last few years there has been a clearer move away from espousing that a fund is run by a ‘star manager’.”

It is because of their consistent teams and backgrounds that Mr Burgeman said Mr Smith and Mr Train still warrant a place in investors’ portfolios. 

“Both managers have a very defined style to how they invest which a) has led to them establishing excellent longer-term track records, and b) helped them weather the dreadful post-2020 Covid markets.”  

Now read: Fund managers criticised over high fees despite poor performance

What makes a good fund manager? 

Repeatable success 

A great track record is one thing, but an investor should weigh up the extent to which the strategy that has previously delivered success will be able to keep delivering high returns. 

“A key consideration is whether a manager with seemingly great performance numbers has done this primarily through exercising sound judgement based on a rigorous process, or simply got lucky,” Mr Hollands said. 

A solid team

A manager who has enjoyed plenty of research support at a larger firm could struggle when setting out on their own.

If a manager has recently moved to a smaller firm, sit tight and see how they do before following them.

A clear strategy

When deciding whether to put your trust in a fund manager, check they have laid out a clear strategy for delivering high returns that makes sense to you.

Mr Hollands said: “I would avoid investing in seat-of-the-pants managers who can’t clearly articulate their approach and expect investors to put trust in their cleverness.” 

If a manager suddenly deviates from their strategy, this could be a red flag. “It was there in plain sight with Woodford, given the radical shift away from FTSE 350, dividend-generating stocks,” said Mr Hollands. 

Who are the British star fund managers of tomorrow? 

Investors should never pick a fund manager just because of their media profile. There are some very strong managers who have delivered above-average returns, but flown largely under the radar. 

Mr Hollands tipped Hugh Yarrow, who manages the TB Evenlode Income fund, which has delivered 135pc over the last 10 years – double that of the FTSE All Share – as well as Michael Boyd and Giles Warren. 

Their little-known Guardcap Global Equity fund has “outperformed the hard to beat MSCI World since launch,” Mr Hollands said, returning 182pc versus the 153pc from the index. 

“Despite Fundsmith-like returns, few investors will have heard of them.”

Now read: Named and shamed: the worst-performing investment funds