David Prosser looks at how investment company managers tend to stay longer than those of open-ended funds.
As the new season begins, football fans unhappy with a spell of poor results will no doubt start calling for their manager’s head - but in their heart of hearts, most know even the best coaches need time to make an impact. Ask Champions League winners Liverpool, whose trophy-less spell under Jurgen Klopp only came to an end at the close of last season, his fourth at the helm. Or talk to Manchester United fans, for whom Sir Alex Ferguson took the same amount of time to win his first trophy before going on to clock up more titles than any manager in history.
There’s a read-across to investment management here. Research published by the Association of Investment Companies earlier this summer showed that half of all investment companies have been managed by the same person for at least a decade. By contrast, a study undertaken by Money Observer magazine last year concluded that the average manager of an open-ended fund spends just seven years at the helm.
Could this contrast be one explanation for the tendency of investment companies to outperform their open-ended counterparts? It’s not possible to say definitively – most of the studies that have looked at performance have tended to focus on pairs of funds run by the same manager, so have not taken into account a change in personnel. Still, the idea that consistency of management is linked to outperformance intuitively feels right.
After all, what we’re looking for from investment funds, whether closed-ended or open-ended, is a consistent level of superior performance over an extended period. We want to earn strong returns over the long term without too many unpleasant short-term surprises. Almost by definition, that is going to be harder to deliver at funds which chop and change their managers.
Experience matters. Global stock markets are currently in an extended bull run, which is now coming up to 10 years in duration. As a result, most open-ended fund managers have only been in charge of their funds during one set of market conditions. How will they react when market circumstances change? Will the experience of more difficult conditions that many investment company managers enable them to cope better? In many cases, the answer is likely to be yes.
Portfolio churn is an important part of this debate. Any new fund manager inheriting a portfolio will want to make changes, just as a new football team manager gets rid of some players to make room for his favourites. That’s not necessarily a bad thing, but changing the portfolio costs money, which can be a drag on performance, at least in the short term.
This is not to suggest longevity is any guarantee of success. Even the most consistently outstanding fund managers can – and do – go through tough times. Look at the recent struggles of Neil Woodford, for example.
Moreover, with long-term success comes new pressures. Not least, more investors want a piece of the action, potentially leaving the manager with more money to look after. Interestingly, of course, this isn’t an issue in the investment company sector, where the fund remains a constant size unless new shares are issued, but successful open-ended funds have suffered as they have become large and unwieldy.
Overall, however, most of us would rather have a fund manager who is in it for the long haul, since that’s the attitude to investment we’re told to take. It doesn’t seem right to tell investors they should be looking at five- to-10-year time horizons when committing to a fund if it’s not likely the manager is going to stick around for that long.