The benefits of experience

Modern football managers know that just a handful of bad games can lead to a painful conversation with the club chairman. Despite a string of studies showing that sacking the manager invariably makes very little difference to the team’s performance – and often makes it worse – clubs continue to chop and change the boss ever more frequently.

Are we set to move that way in asset management? Factors such as the power of social media, increased scrutiny of fund management firms (a good thing, by the way), and the rise of the star investment manager all have the potential to lead us in this direction. Today, when funds suffer a period of underperformance – particularly when they’re well-known funds run by widely-followed managers – the pressure ratchets up very quickly; critics start to sharpen their knives.

Against this backdrop the figures published this week by the Association of Investment Companies make interesting reading. Half of all AIC-member investment companies have had at least one manager in place for 10 years or more; a quarter have a manager who has been in post for more than 20 years. The longest servers of all, Capital Gearing’s Peter Spiller, Rights & Issues’ Simon Knott and Value and Income’s Angela Lascelles and Matthew Oakeshott, have all been at the helm for more than 30 years.

Now, you might argue that these extended tenures underline some of the old clichés about the investment company industry – in particular, that closed-ended funds are somehow a backwater of the asset management industry lacking in dynamism or any imperative to modernise. After all, as recent research from Money Observer magazine pointed out, the average tenure of an open-ended fund manager is seven years. Aren’t open-ended funds doing a better job of bringing in fresh talent, responding to the marketplace and staying up-to-date?

Well, it rather depends what you want from your fund manager. A manager with seven years of experience will have come into the job after the financial crisis and only run the fund in these exceptionally unusual times. They’ll never have managed the fund through a recession or a bear market – they’ll barely even have seen an interest rate rise.

By contrast, the most experienced investment company managers have run the same fund through a string of different governments, recessions and booms, stock market disasters such as the TMT collapse in 2000, the credit crunch and the extended bull market that has endured since then. Experience doesn’t necessarily equal expertise, let alone outperformance, but surely it must help? All the more so in an increasingly volatile global marketplace where the unexpected is becoming almost routine.

The one piece of advice we always give investors in equities and other risk assets is that it’s essential to take a long-term perspective – to look at their investments over a five-year period at least, if not longer. Surely the same principles should apply to the individuals looking after their money.

This is not to suggest that a fund manager should be untouchable. Where a fund consistently underperforms with no mitigating factors or obvious prospects of an improvement, it is quite right that investors and their representatives ask some searching questions. It is to be welcomed that in recent times, investment company boards have got better at holding managers to account.

However, investment styles rise and fall from favour. For example, there are periods when value investment outperforms; at other times, growth stocks come to the fore. Small cap stocks tend to outperform their larger counterparts over time, but often have periods where they lag. The debate between active and passive management remains finely balanced.

For all these reasons, investors who find tried and trusted managers able to deliver decent returns over the long term are in a fortunate position. Invariably, it works out much better sticking with a veteran fund manager who has been there and done that than jumping from one hot fund to the next or staying in a fund that keeps chopping and changing.