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Changing of the guard

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13 March 2020

David Prosser looks at the effects of manager changes on portfolio performance.

When an investment fund is under-performing, will changing its manager put things right? Not necessarily according to interesting research just published by Money Observer magazine. It looked at 10 investment companies that changed manager between 2004 and 2014, analysing how they performed over the five years following the new management team’s appointment. Five subsequently beat their sector average; the other five came up short.

It’s not the biggest sample, but even on these limited numbers, this research tells us something important – that a change of management will not automatically guarantee a change of fortunes for a fund struggling to deliver for its investors. This is a noteworthy finding in itself given the undoubted trend in the investment sector in recent years for more frequent management changes. Investment company boards have become increasingly impatient with disappointing returns – and increasingly prepared to take radical action – but that may not lead to better performance.

That said, from the perspective of advisers and investors, it’s encouraging that boards have become more confrontational. The fact that investment companies have independent boards with duties to protect the interests of shareholders is a real selling point for the sector, so it’s great to observe that principle in action.

Indeed, it would be good to see both advisers and investors ask investment company directors more searching questions about how they are exercising their fiduciary responsibilities. Where a fund isn’t performing as all would hope, what are the directors doing to hold the manager to account? That doesn’t have to mean firing the manager, but the board is there to ensure shareholders’ interests are being looked out for.

The evidence is that boards are getting better at doing that in a variety of different ways. This is one reason why, for example, we are seeing activist investors targeting the investment company sector less frequently than in the past. Underperforming funds with apathetic boards were once considered easy pickings by activists who would agitate for change, but such stories are few and far between these days – largely because apathetic boards are in short supply.

In some cases, boards are effectively automating intervention. For example, discount control mechanisms that require the manager to take certain steps when the discount reaches a set level – to buy back shares, for example – are one example of this. Other types of intervention are softer but no less effective for that. Don’t underestimate the impact of the critical questions that boards ask of their managers on an ongoing basis. These help managers think about issues and problems in new ways – to step back from the “groupthink” that may dominate their own organisations.

There is no single right answer here. The fact that only half the funds in Money Observer’s research did better after changing manager is a reminder that investment success isn’t only a question of personnel. Smart investment company boards explore all sorts of different levers as they seek to boost performance.

The important principle here though is accountability. Only in investment companies are there formalised structures for scrutiny, review and intervention; other types of fund, effectively an asset manager’s product, do not feature them. Naturally, much depends on the ability and willingness of the board to make good use of the structures – and, even when they do so, to make difficult judgements about the right actions. Even so, the value of accountability is enormous.