Penny Pryor speaks to Chris Cuffe, Patrick Farrell and Peter Sumner about the role of 'stars' in a post-GFC industry...
Not so long ago, the “star fund manager” was alive and well. He, or occasionally she, was the darling stock picker that institutions would push forward as their brand at every opportunity – until they left the business of course.
Even the offer of equity couldn't keep them in the fold forever. And with their departure, so too went millions, and in some cases billions, of funds under management.
In a post-GFC environment, big investment houses, many of them now owned by banks, have become much more risk adverse and less willing to focus on one individual. The team, rather than the individual, is promoted and marketed. Does personality even matter anymore?
“I’ve always thought the best fund managers are the ones with quite unusual personalities.” Chris Cuffe
Patrick Farrell is head of Advance Asset Management and chief investment officer of BT Financial Group. He looks after manager selection for their fund-of-fund products.
“I think the business risk associated with an individual is far too high for businesses these days,” he says.
At Advance they look at a gamut of factors when doing due diligence on fund managers. Of course decision-making processes and risk management systems are crucial.
“We do spend a lot of time looking at governance,” Farrell says.
“We look at overall team dynamics to try to ascertain how the decision gets made and how is it implemented into the portfolio.”
He suggests that perhaps retail investors, rather than institutional, gravitate towards a name, something they definitely did in the 1990s and early 2000s.
But he is prepared to move money if a fund manager moves shop, and they can’t see sufficient experience left in the remaining team.
The problem is, according to Farrell, that fund management companies that do have a lot of systems and processes in place, often don’t achieve better than average returns.
“What we’re trying to do, is avoid this turnover of money simply because someone doesn’t exist anymore.” Peter Sumner
Chris Cuffe, former chief executive officer of Colonial First State and now founding director of Third Link Investment Managers, backs this up. All of Third Link’s management fees, net of expenses incurred are donated to the non-profit sector.
Cuffe says that good fund managers tend to have a slightly “mad scientist” reputation.
“I’ve always thought the best fund managers are the ones with quite unusual personalities,” he says.
“They would have outlier personalities.”
During the 1980s and 1990s the big companies would breed the stars, who then went and started up their own boutiques.
“In those early days they were able to becomes stars because we went through a 20 to 30 year strong growth market and all these people looked like gurus and I think the funds did promote their rock stars,” he says.
Peter Sumner, MLC head of Australian shares research is also involved in his company’s manager selection process. He says the initial investor or manager who started the process is an important factor they consider in their due dilligence, but so too are the dynamics around how that philosophy is shared within the firm.
“Obviously we don't wish to engage with fly-by-night institutions or people simply because they have a name per se. We would look for that philosophy to continue,” he says.
He also points out that nobody, including institutional investors like him, and perhaps even the star fund managers themselves, wants to be moving large sums of money between investment houses on a regular basis because of the potential tax consequences.
“What we’re trying to do, is avoid this turnover of money simply because someone doesn’t exist anymore,” he says.
“That would force an investor to keep shifting their money constantly…so every time they shift out of one fund into another, they would actually have tax consequences.”
Although fading, the star manager has not quite disappeared yet, which may not necessarily be a bad thing if it is the “outliers” that make investors money.
But as Cuffe points out, the next decade is going to be fascinating.
“You’ll see most of these stars will be retiring and it will be interesting to see what they do,” he says.
The larger groups have not been able to, nor wanted to, incubate these gurus like they did in the 1980s and 1990s, and their legacy as superstars may be quickly forgotten if they can’t work out succession plans for their businesses.