Let’s hear it for the old timers

Does fund manager tenure matter? The Association of Investment Companies has just published a list of no fewer than 27 managers who have run their funds for more than 20 years, topped out by Peter Spilling of Capital Gearing, who celebrates his 40th year in the job this month. It’s an admirable story, but non-sentimental investors and their advisers may wonder if they should care.

They should – because there does seem to be a link between time in the job and superior returns. The analyst Morningstar recently did a study that found the longer the manager has run a fund, the more likely it is to outperform. There is a correlation, it found, between tenure and average performance.

That makes sense for a couple of reasons. Partly, this is a self-fulfilling prophesy – managers that do better tend to keep their jobs, while those falling short may move on, by choice or otherwise. So, any analysis of long-serving managers’ performance will be slanted towards funds that are doing better.

However, there are other factors at play here. “Managers who have run the same fund for a long period of time are more embedded within the investment team, know the fund and the companies it invests in better,” says Morningstar’s study. “They are familiar with their analysts and know how to use the resources at their firm, which can vary dramatically between investment houses.”

Intuitively, that sounds right. In most jobs, people get better as they acquire experience; they work out how best to deploy the resources at their disposal, they learn from having to perform their roles in different conditions, and they make mistakes that provide valuable lessons.

This is part of the reason why advisers get nervous when a fund changes its manager. It’s not just that the previous manager was a known quantity while the new one isn’t; it’s also the concern that the new appointee is bound to take time to get to know the fund and to learn what works and what doesn’t.

None of which is to say that sticking with managers through thick and thin is a guarantee of investment success. Clearly, there are times when a manager’s time at the fund has run its course and there is a need for new blood. Indeed, many investment company boards have become more ruthless about changing managers in recent years.

Nevertheless, manager tenure is an important consideration for many analysts and advisers when recommending funds – and that is a good thing. Investors are entitled to be reassured that they are entrusting their money to an individual with experience and a proven track record.

Where, then, to find these long-serving managers? Well, as the AIC’s list of old-timers illustrates, the investment companies sector certainly has its fair share of experienced managers. Indeed, Morningstar’s analysis, which looked specifically at the UK Equity Income sector, found the average investment company manager there had been in post for 12 years and 10 months, against six years and 11 months for the typical open-ended fund manager.

One explanation for that contrast is the governance structure of investment companies. Operating as listed entities with independent boards of directors, investment companies foster stability and consistency over the longer term. The culture of open-ended funds, on the other hand, is more product-driven; managers are often moved on to the next big thing.

There are no guarantees. Indeed, you might take the view that old dogs can’t learn new tricks – that longer-serving managers may struggle to adapt as markets change, particularly now that the pace of change appears to be accelerating. Still, the data suggests otherwise – manager experience genuinely seems to be at least one ingredient of a recipe for investment fund success.