Picking from thousands of funds can be a daunting task, particularly for new investors, but finding a well-known manager that has proven reliable over several years could be the best way to use your money, according to experts.
Backing the young upstart can give investors a motivated manager that will work hard for better returns at the start of their career, but it can just as easily lead to disaster if choppy markets highlight their inexperience.
Older, wiser fund managers that have been through at least one market cycle – typically both a bull and bear market – are viewed as the safer choice.
Kamal Warraich, an investment analyst at Canaccord Genuity Wealth Management, said there was no substitute for experience.
“Investors who have been through a variety of market conditions and multiple economic cycles will have learnt some hard lessons along the way. Surviving these historic episodes implies a high level of fortitude, adaptability and resourcefulness,” he said.
There is also an implied level of trust with someone who has been doing something well for a long time, which is of “paramount importance”.
Finally, although predictability may not be attractive in other walks of life, with fund management it is key that managers stick to a philosophy and process, as this allows investors to build a diversified portfolio.
“A quality manager who invests defensively, is likely to protect more capital in a downturn. This helps when modelling return profiles,” Warraich added.
He highlighted both the £1.2bn Slater Growth fund, which has been run by Mark Slater since 2005, and the £1.1bn Liontrust Sustainable Future UK Growth fund helmed by Peter Michaelis from 2001 as good examples.
These funds have consistently beaten their rivals over the past three, five and 10 years, as the below chart shows.
Total return of Liontrust Sustainable Future UK Growth and Slater Growth vs the IA UK All Companies sector and FTSE All Share index over 10 years
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Source: FE Analytics
Rob Morgan, chief analyst at Charles Stanley Direct, said picking fund managers with a strong track record should only be used in place of passive funds – his default option – when there was a good reason to do so, such as specialist knowledge.
“Looking at a track record in isolation only tells part of the story though. To gauge whether outperformance can be repeated its important to dig deeper and, in particular, account for how different investment styles fare in various market conditions. As UK investor Jeremy Grantham put it, ‘90% of what passes for brilliance or incompetence in investing is the ebb and flow of investment style’,” he said.
So as well as enduring outperformance – ideally for at least a decade – Morgan said he liked managers that ran high-conviction portfolios with a willingness to “go against the grain”.
One way to do this is to look for the fund’s active share, which measure how different it is to its benchmark index.
He said: “If you are paying for active management that is what you should get, though you have to accept the other side of that in terms of potential underperformance too. In fact, this is inevitable at times.”
When investing with a well-known manager that has a strong record, investors are likely backing an individual or team with a rare set of skills, which should work over the long term providing investors do not sell out too early when the tide changes.
“It is important their process is repeatable, though. In some cases managers might be impeded because something has changed, perhaps their team and resources, or maybe because they are running a larger amount of money and this makes it more challenging to back their best ideas.”
He cautioned that buying a name without knowing where and how the fund invests was not a good idea as it might not match an investor’s tolerance for risk.
Tom Sparke, investment manager at GDIM, said big names had been very attractive to investors and allocators as a fund’s track record was “vital to assessing the environments in which it may excel as well as building an idea of how it performs when the chips are down”.
“Past performance is not a guide to future returns but when history rhymes (rather than repeats) performance often does too.”
However, unlike Morgan, who suggested investors should look for a 10-year track record, Sparke said investors can also trust managers that have done well in a specific market environments,
Baillie Gifford Positive Change, for example, has excelled when markets have risen by buying companies that were more volatile than the market. This approach made it the top performer in 2018, 2019, 2020 and again so far in 2021.
Total return of Baillie Gifford Positive Change vs sector and benchmark since launch
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Source: FE Analytics
Sparke said he would back the £2.9bn portfolio to repeat this success in similar environments in the future, given its strong track record, but would anticipate it to struggle in different conditions.
“The key to success in backing a ‘big name’ lies in checking if the market environment and remit are the same as when the success was achieved. As investors in Neil Woodford or Anthony Bolton know to their cost, venturing into new territory can unearth unforeseen dangers,” he said.
Although managers Kate Fox and Lee Qian do not have the longest track record – they took charge of the fund in 2017 – three years is viewed by some as the minimum time an investor should wait before investing.