Hard act not to follow

In principle, when fund managers leave their investment houses, investors should follow with their money. But not always, writes Simon Hildrey. The recent high-profile departure of Tim Russell from HSBC to join Cazenove left European private investors facing an all too common dilemma. Should they withdraw their money from his equity fund and follow Mr Russell to Cazenove or keep faith with HSBC? Netherlands-based private bank Insinger de Beaufort was left in no doubt as to what it should do. It instantly withdrew the money invested through its multi-manager funds and placed it in index-tracking funds. There it will remain until Mr Russell launches his new fund. The decision reflects Insinger’s belief that the fund manager can be more significant than the asset management company in delivering performance. But while Kobus Human, managing director of Insinger de Beaufort, stresses that in principle, investors should follow fund managers to their new home, there can be exceptions to this rule. Manager style “The decision depends on whether the manager had delegated investment responsibilities to the rest of his team. In this case, investors might want to wait to see how the team does without the lead manager as there should not be much disruption to the investment process,” says Mr Human. “But if the lead manager had lots of freedom to run the fund in his own style, investors would be advised to withdraw their money.” Mr Russell, for instance, had a reputation for managing his fund at HSBC in a unique style that would be hard for any other manager to replicate. But, while in these circumstances investors might decide to withdraw their money from a fund, it does not necessarily mean that they should follow the manager to their new investment house. “It is important to establish if the manager will be working in the same environment as he experienced before,” says Mr Human. “Investors should wait six months to see if the manager can replicate his earlier performance, particularly if he has set up his own boutique business.” In setting up a boutique business, fund managers accumulate extra corporate responsibilities, such as looking after non-investment employers. The departures of Neil Pegrum from M&G to Insight in September and Mr Russell from HSBC to Cazenove were simply the latest in a long line of managers who have recently quit their funds. In the UK alone, more than 50 funds have lost their managers since the start of 2000. Review then switch Swedish-based intermediary firm BTL Financial Services agrees that in principle investors should follow the fund manager in these cases but that few European investors do so. “Investors tend to pick funds based on the asset management company rather than on the individual manager,” says Larswennstlrom Strom, an adviser at BTL. Rather than slavishly following managers, however, Mr Strom argues that investors should review the performance of the new manager or team before switching funds. For long-term investors, however, Mr Strom adds that it is more important for clients to switch between funds as investment styles come in and out of favour than because the manager leaves. In the bull market of the late 1990s, value funds suffered in comparison with their growth counterparts. “We recommend that clients switch between value and growth funds as the environment for these styles change,” says Mr Strom. Indeed, he adds that after the falling equity markets of the past two and a half years, investors have been turning away from equity managers rather than tracking their movements. One leading fund of funds manager who works for a Swiss institution, but did not wish to be named, argues strongly in favour of investors following the fund manager. He says: “The fund manager is all important. I have never known a poor fund manager who was made good by the process and procedures used by an investment house. “Fund managers simply go where they can earn the most money. But this does not mean investors should not follow them.” Switching funds when managers leave is expensive and can trigger a tax charge. Investors therefore may want to consider the alternative of handing their investments to a multi- or discretionary manager who will track the fund manager’s movements for them.