With the performance and suspension of Woodford Equity Income hitting the headlines this year, Ellie Duncan investigates whether investors are better off backing a lone fund manager or a team.
The star manager approach to running funds has come under scrutiny again recently due to the woes of Neil Woodford.
Having established his reputation for stockpicking at Invesco Perpetual, where he ran UK equity income funds, Woodford left the asset manager in 2014 to set up Woodford Investment Management.
But trading was suspended in the Woodford Equity Income fund on 3 June after a period of underperformance led to significant withdrawals from the fund, which did not have the liquidity to meet demand.
Many investors will have followed Woodford from Invesco to his own company, after he built a track record for outperformance.
Dan Brocklebank, head of UK at Orbis Investments, highlighted the reasons for investors choosing a fund with a single decision-maker.
"This might be for psychological reasons, or it could be because it is arguably easier to assess that person's track record and to understand their rationale for the portfolio's positioning," he said.
"However, the big risk with a 'star' system is sustainability. Stars can lose their edge, retire, switch firms, or drift away from their stated philosophy."
Another issue with the 'star manager' approach is succession risk.
Alex Farlow, head of risk based solutions research at Square Mile Investment Consulting & Research, said: "With a star manager, there undoubtedly comes increased level of key person risk. That is, if the manager is crucial to the fund's performance and approach, the consequences of said manager leaving are far more meaningful.
"The departure of the star manager is likely to be met with outflows and a significant loss in investor conviction. Key person risk is markedly higher for smaller fund groups, which are centered around a handful of funds run by one or two renowned managers."
Farlow said many of these fund managers have become star managers because they have proven their worth in some way, through consistently meeting or exceeding their fund's performance objective, their ability to successfully navigate through a variety of market conditions or their unorthodox investment style.
Earlier this year, Willis Owen analysed 15 investment funds that saw their star managers leave at some point between 2013 and 2017, and found the level of outperformance dropped dramatically following their departure.
The analysis showed the funds with star managers at the helm had, on average, annualised outperformance against relative benchmarks of 3.6%, which fell to 0.4% once the managers had left and new managers had taken over.
Woodford's former Invesco Income and High Income funds, which were taken over by Mark Barnett, were included in the research, as was Richard Buxton's UK Alpha Plus fund, which he left behind following his departure from Schroders in 2013.