With the closure of Neil Woodford’s flagship fund and his self-named investment firm, coupled with an era where fund flows into passive vehicles are higher than ever, active management has never had a stronger need to prove itself.
The funds industry has a long history of star managers – individuals who, on the basis of strong track records, giant funds and plenty of media attention, have proven popular with private and professional investors. Indeed, several such as Woodford have at times appeared as figureheads for active management as a whole.
But times might be changing. The disappointing performance and ultimate closure of the LF Woodford UK Equity Income funds may have led to the chastening end of Woodford’s three-decade investing career but also acts as another piece of ammunition for critics of active management – at a time when passives are taken a growing share of flows.
Percentage of Investment Association universe in tracker funds
Source: Investment Association
In light of this scepticism of active management and move towards passives, is the ‘star manager’ label still as important as it was and just what qualities make a good active manager?
Rob Bailey, head of UK wholesale distribution at AXA Investment Managers, believes the whole idea of a star manager is “kind of misrepresenting exactly what’s going on [within a fund] in my first-hand experience”.
He used the example of Nigel Thomas, who retired earlier this year and handed his £1.6bn AXA Framlington UK Select Opportunities fund to Chris St John.
Bailey said: “Nigel was held up as one of those ‘star managers’ but Nigel would be the first man to tell you that actually he got a lot of ideas from Chris St John. He would rely on Richard Peirson to give him thoughts and processes.
“Even though I think, optically people held him up as a ‘star fund manager’, he was as good as the team that surrounded him.”
Performance of AXA Framlington UK Select Opportunities under Thomas
Source: FE Analytics
He added that this dynamic has continued in the current AXA IM UK equity team today.
“Chris works really closely with Dan Harlow, who’s the small-cap fund manager, and gets a lot of ideas from him. He works really closely with Simon Young, the equity income fund manager who’s got more of a large-cap exposure, and Chris gives him a lot of input too.
“Chris St John is the named fund manager and Chris is the man who’s responsible for making the decisions, but he’s got this bedrock of support underneath him.
“So, I think what the industry recognises is that there are some very talented, individual fund managers but those fund managers need the support network around them. I think that that’s important for maintaining the kind of long-term performance which our clients want.”
One important aspect of being a good fund manager, according to Bailey, is a willingness to admit that a mistake has been made or something hasn’t gone as anticipated.
“Being able to actually say ‘I got that one wrong’ and then fixing it. That is quite a powerful tool to have in your armoury,” he said. “I think the worst outcome for a fund manager is when they start to believe that they’re right all the time. I think that you have to accept that sometimes you’re wrong and have the humility to deal with that.”
This is especially important in the current investment environment, which is being influenced by a host of issues – including but not limited to Brexit, trade wars and unconventional monetary policy.
“Right now, it’s hard to be a fund manager because your fund could be side swiped by something you can do very little about,” he said.
But Bailey (pictured) explained that while the top-down climate appears chaotic at the moment, over the long term that is not the biggest impact or risk on a portfolio – it’s about the quality of businesses that a fund is invested in.
“One of the great statistics that we have shows the breakdown of returns. Over the first 12 months the majority of your returns are driven by price movement on a margin of expansion and contraction,” he explained.
“But over 10 years the majority of your return actually comes from revenue growth. It’s more about how successful a company is over 10 years. So the market impact is in the short term and the company impact of the long term.”
This means another attribute of a good fund manager is a willingness to adapt, rather than blindly stick with their previous decisions.
“We just have to recognise that the only constant is change,” Bailey said. “The market will continue to evolve and we have to make sure that we’re ready.”
AXA IM sees itself as a long-term, bottom-up investor and this means that its managers are not looking for companies that they think will have a strong 12 months, but those that they are confident in over the coming “three, five, seven, nine, 12 years”.
“We’re investing in companies in the long-term and if the information changes we reserve the right to change our mind, and that’s the ultimate skill of a fund manager is recognising that the facts have changed,” Bailey said.