Investors should sit tight following the announcement of FE Alpha Manager John Wood’s upcoming departure from the helm of the £1.8bn JOHCM UK Opportunities fund, according to a number of investment professionals.
While a majority agree that current co-managers Rachel Reutter and Michael Ulrich are well-placed to maintain the fund’s strong long-term track record after the manager leaves in September, some warn that the change in leadership dynamics should be carefully monitored.
The five crown-rated fund was launched by senior manager Wood in November 2005 and, since then, it has outperformed its FTSE All Share benchmark and average peer in the IA UK All Companies sector by a respective 60.36 and 63.92 per cent with a total return of 177.5 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
It has done so with a top-decile annualised volatility, maximum drawdown (which measures the most money lost if bought and sold at the worst possible times), Sharpe ratio (which measures risk-adjusted returns) and downside risk ratio (which predicts a fund’s susceptibility to lose money during falling markets) over the same time frame.
The fund’s stellar risk/return ratio is a result of his defensive portfolio positioning. While it has a concentrated portfolio – which currently consists of 26 holdings – each stock is chosen using a rigorous selection process, which has been developed largely from the manager’s time spent at Newton. 
Within industries that have high barriers to entry, he will aim to select stocks that have high returns on equity, good margins and low capital intensity. Essentially, he looks for companies that are able to create their own growth rather than relying on cyclical upswings.
Given the fund’s dependence on active stock selection, as well as the fact Wood (pictured) is the only senior fund manager listed on the portfolio (Reutter and Ulrich joined as co-managers in 2012 and 2015 respectively), should investors be looking to change their views on whether they hold it or not?
“A lot of funds are run without taking big bets and are rightly or wrongly quite heavily constrained by the benchmark. If that’s the case, it probably makes very little difference if your manager is leaving,” Patrick Connolly, head of communications at Chase de Vere, said.
“Where you need to pay closer attention is if you have a manager that has a lot of flexibility in terms of what they do and the success of the fund in the past has been driven by the fund manager’s stock-picking abilities.
“Under those circumstances you will need to make a judgment in terms of whether the new manager will be able to replicate that.”
Darius McDermott, managing director at Chelsea Financial Services, has urged investors not to make any rash decisions, but says he needs to meet the new joint managers to be absolutely sure that its strong track record is set to continue.
“Clearly there is no need to do anything today. John is an excellent fund manager. Whenever managers leave, it’s usually a bit of a surprise. This one wasn’t as much of a surprise,” the managing director said.
“When they bought Michael Ulrich in from F&C to join the team in 2015, it looked like sensible succession planning. Here we are two years later and that’s what happened.
“Michael ran a successful UK mid-cap fund at F&C. while I have never met him, the numbers are pretty transparent.
“We will need to meet the new managers, I know they’re already part of the team, but they clearly will be taking full responsibility in September.”
Jason Hollands, managing director at Tilney Group, agrees that there is no need for investors to take any hasty action as John Wood will remain in situ until September.
He also points out that the fund is defensively positioned given its hefty 28 per cent money market holdings, which reflects Wood and his team’s concerns about outlook and valuations.
“There has clearly been quite a bit of succession planning going on with the recruitment of Michael Ulrich and Rachel Reutter as members of the team,” he said. “I know Michael well, as we used to work together at F&C, and regard him highly.
“He has developed an enviable track record in his own right, principally in the mid-cap part of the market. Rachel Reutter’s background was as analyst at Goldman Sachs. Our research team will be meeting Michael and Rachel shortly as part of our normal process in these circumstances.”
Kerry Nelson, managing director of Nexus Independent Financial Advisers, says the fund’s defensive positioning makes it attractive in the current environment, given the number of geopolitical and macroeconomic uncertainties on the horizon.
As such, she believes it is in Reutter and Ulrich’s best interests to maintain the fund’s cautious positioning and doesn’t envisage them drastically overhauling the portfolio any time soon.
“I think they would have worked towards this for some period of time so, in terms of what has gone on behind the scenes, it wouldn’t have been such a sudden situation,” the managing director reasoned. “I think that’s the whole point of working alongside a team as well; that you feel you can securely hand over assets.
“You have to bear in mind as well that these are huge assets, the fund is £1.8bn which is a lot of money to manage.
“The approach they had in terms of the team respect would be one to secure the future of that fund as well, because they wouldn’t want to see significant outflows.”
FE research manager Charles Younes says the team has decided to retain the fund’s ‘buy’ status, as it has met Reutter and Ulrich before and is confident they will retain Wood’s tried-and-tested investment approach.
He also points out that the succession plan has been in place for a long time and, as the fund has grown in size, JO Hambro have had to exercise particular caution to ensure the transition will be as smooth as possible.
“We are fine with the change. It’s a low turnover strategy, so the portfolio won’t change dramatically until September after his departure,” he explained. “The approach has always been collated between the three of them, although John was taking the ultimate responsibilities for decision-making.
“Rachel has learned from John and Michael has embraced the investment process since joining the company, so I don’t think there will be a dramatic change to how the team is managing money.”
That said, the research manager says the change in team dynamics will have to be closely monitored.
“Obviously we need to meet the team over the coming weeks before John leaves; we’re moving from a situation where you had a lead manager and two deputy managers, to a situation where you’re going to have two co-managers,” Younes said.
“We should not see any conflict between Michael and Rachel over the coming weeks but it’s something that could happen, and we need to ask them about who will be the ultimate decision-maker.
“Is the track record is likely to be split between the two of them? Obviously you need to ask these questions, even if the managers are embracing the same investment philosophy.”
Simon Evan-Cook, senior investment manager at Premier Multi-Asset Funds, says the proposed changeover date of September 2017 allows the firm – as holders of the fund – to make a reasoned decision and avoid any knee-jerk reactions.
“John has brought on Rachel Reutter and Michael Ulrich, and moulded them in his own image as investors. This is very different from a situation where the whole team is leaving, and new management needs to be drafted in from elsewhere, signalling a potential break with the previous style,” he said.
“A second consideration is liquidity. If this was a large fund holding illiquid assets, there would be a risk of a ‘run’ on the fund, where investors rush for the doors en masse.
“This can result in sharp price drops, or investors being locked into the fund as they manage withdrawals. Thankfully this doesn’t apply to the JOHCM fund, as its holdings are reasonably liquid, and it currently has a large cash position.”
Chris Ralph, chief investment officer at St. James's Place,(Wood is also one of the three lead managers responsible for the St. James's Place UK & General Progressive fund), added: “John will be continuing his role until the end of September and then Rachel Reutter and Michael Ulrich who are well-established members of John’s team at JOHCM will assume lead responsibility for the management of his sleeve of our fund.
“In the meantime the St. James’s Place Investment Committee, with advice from Stamford Associates, will engage with JOHCM to closely monitor the mandate in light of this announcement.”
JOHCM UK Opportunities has a clean ongoing charges figure of 0.82 per cent and yields 2.79 per cent.