“One of the scarcest things in an asset management firm is investment skill,” according to Dan Brocklebank, head of Orbis Investments UK, who said it takes “at least a decade” to be confident that someone is a good stockpicker.
“It's very difficult to find good investors. Our success rate is probably one in five in terms of the people we bring into the investment team that really go on to be very, very successful,” he said.
This is not just a challenge for fund management groups, but also for investors, who have to determine whether to stay with funds once a manager has left.
Even the most experienced fund managers retire, he noted, and usually they do so far earlier than in other industries.
“There are a few in the world who can do it for 50 years, but actually, a lot of good investors just get to 20 years and say ‘you know what, that's enough for me’,” he said.
This creates a dilemma for investors, particularly those investing for retirement or other very long-term goals, who could be putting money away for 40 years or more.
“You could easily have an investment horizon that's twice the length of a successful investor's career,” Brocklebank said.
As a result, Orbis focuses on building teams rather than focusing on star names or individual reputations.
Additionally, even the best stockpickers in the world “can't get beyond 20 or 30 companies in great detail” without spreading themselves too thin, so more people on the team means more companies can be researched.
It is also a key reason why the asset management firm keeps its fund range small, with just three portfolios available in the Investment Association universe.
“It's really hard to find a small number of [good] people, the last thing you want to do is dilute them by spreading them out across too many funds,” said Brocklebank, who also noted they should ideally not be “distracted” by other obligations, such as fulfilling other job titles.
Orbis is unusual in this regard, he noted, as many asset managers tend to launch new products regularly.
“The incentive in the industry is to have as many funds as possible. Some of them won’t be of interest to anyone at the moment, but some of them might be,” he said.
This approach has two benefits. The first is that, with multiple strategies, some will produce top returns while others falter, meaning a firm can always advertise products that are at the top of their peer groups.
The other is to grow profits. Asset managers charge fees for running funds, so the larger these scale, the more money the firm makes. In some industries, revenue growth could be done by raising prices, but the rise of passives has made it more difficult for active managers to justify higher fees.
So if funds are underperforming, are out of favour with investors or have reached a natural ceiling in terms of the money they can accumulate, new products may be needed to continue growing as a business.
This is where investors need to be diligent. Are these funds being launched because there is genuine demand? And, crucially, do the managers have the right expertise and the time to take on a new product?
“The key relationship to understand is the owners of the asset management firm. Often, that's the portfolio managers, but it might be external shareholders,” he said.
“External shareholders want profit growth. So being able to offer a new fund every so often is very healthy in terms of growing assets. It's all rational,” he said.
The risk with launching new funds is that it erodes trust among investors, with Brocklebank noting that financial services does not “rank very high” when it comes to consumer data.
“I think that's actually a really big problem, from a societal perspective. People need to take some steps towards becoming financially independent in their retirement. They can’t rely on the state. And if they don't trust the industry, then it's a really big problem,” he said.
“I think fund proliferation is not the one thing that's destroying trust, but it’s one thing of many. In an ideal world you’d have a financial services industry that people really trust.”