The input of different managers who are of equal standing within a team provides huge benefits to the investment process, Surplice believes. “Each manager has responsibility for his or her own fund, but we share ideas. The other managers are partly a sounding board, but you also benefit from their knowledge and experience.”
Capacity constraints
A common problem star managers face is that once they have built a name, they can see inflows rising exponentially. This can lead to capacity constraints, prompting a change in style by the manager. Clearly, this is a problem that can affect any fund that becomes very popular, but star managers in particular invite high levels of concentrated asset flows as their reputation grows.
“When star managers become bigger, they may feel forced to change their investment style,” says Vetter. “For example, they may have to take more liquid positions in larger companies.” A fund that had to cope with the issue of rapidly growing in size is the Skagen Kon-Tiki Fund. From 2009 to mid-2011, the fund massively outperformed the MSCI Emerging Markets Index and consequently saw its assets under management swell from well below €2bn at the beginning of 2009 to more than €5bn at the end of 2011.
But since then, it has lagged the index (see graph). Industry sources say this underperformance is at least partly due to capacity constraints. Fund manager Knut Harald Nilsson said in an interview with Citywire in November 2013 that “it might be easier” if his fund were smaller, admitting it was reasonably big, but he dismissed the suggestion this was affecting performance.
Gimeno aims to get out of a fund before these issues manifest themselves. “We sometimes keep a star manager for three or four years,” she says. “But we usually sell a fund when it starts showing capacity constraints that lead to style drift.” However, there is another solution in such a case: to soft-close a fund. “First State and Aberdeen have also seen big inflows in their emerging market equity funds, but they soft-closed them,” says Vetter. “I find that laudable, as it shows they are committed to their investment base.”
Gimeno agrees. “A soft-close is often a good thing for investors but if we get a lot of inflows into our funds of funds, we will have to adjust our weighting.” In case a fund becomes too big or a manager departs, Morabanc sometimes has a replacement fund lined up. Such a thing didn’t happen in 2015, but in 2014 the Andorra-based privatebank sold two funds because of manager change, the Bestinver Bestinfond, a European equity fund, and the Ignis Absolute Return Government Bond Fund.
“To replace the latter one we immediately bought the Kames Absolute Return Fund,”she says. Providing a replacement for the Bestinver fund proved more difficult though, according to Gimeno. Eventually her team decided to buy the Robeco Global Premium Fund, which also has an unconstrained value style but is, as its name suggests, a global equity fund.
There is no simple answer to the question of whether to favour star managers and teams, but the advice seems clear. If you are looking at a star manager, find out what level of control they truly have over the investment process; and if it is very high, make sure they have a distinct investment style they have taught to a strong-willed deputy. And, in case that doesn’t work out, always have a back-up fund waiting in the wings.
