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James Carthew: ouch! Watch out for key manager risk

James Carthew: ouch! Watch out for key manager risk

Events of the past couple of weeks have highlighted the impact that the departure of a manager can have on the rating of a trust. First, we heard that Carlos Hardenberg is to leave Franklin Templeton and then Philip Rodrigs was ousted from River & Mercantile.

Both events were unexpected and both appear to have perturbed investors, although it is hard to gauge the true impact as these events occurred at the same time as the market wobble.

Hardenberg’s departure was announced on 1 February. The discount on Templeton Emerging Markets (TEM) widened from 9.5% to 11.2% on the day and was 13% on 6 February.

I wrote about the trust in June 2016 not long after Hardenberg had officially taken over and shaken up its portfolio. The changes he implemented made a real difference to performance. Over the past year, it led its peer group in net asset value (NAV) total returns and, until this news emerged, its discount had been narrowing.

This improvement was overdue, however, and Templeton Emerging Markets has some way to go before its long-term figures catch up with those of JPMorgan Emerging Markets (JMG). It needs to maintain its momentum in terms of both investment performance and marketing itself to potential investors.

Chetan Sehgal, who will take over at the end of March, has the experience to do the job and has worked on the portfolio with Hardenberg since Mark Mobius stepped back over two years ago.

The implication is that it will be business as usual: ‘the investment manager will continue to adhere to the time-tested Templeton investment philosophy of bottom-up, long-term, value-oriented emerging markets investing,’ the trust stated.

Which is fine, except that isn’t what Hardenberg did. The main reason that Templeton Emerging Markets has done so well recently has been its overweight exposure to technology and related sectors, with big positions in stocks such as Brilliance Automotive, TSMC, Alibaba and Tencent – which you might struggle to describe as value stocks.

Hardenberg radically altered Templeton Emerging Markets’ portfolio when he took over. The vast majority of the 52 new holdings he introduced to the portfolio were IT stocks and he scythed the fund’s exposure to the energy and materials sectors.

One of Hardenberg’s responsibilities with Franklin Templeton was director of frontier markets strategy so it was no surprise he upped its exposure to this area.

What will Sehgal do? It may be that, given his responsibility for small company strategies within the Templeton Emerging Markets Group, he will look to up the exposure here as well. To my mind, that might be a good thing in the long run. It seems unlikely though that he won’t put his own stamp on the fund.

Contagion risk

In the case of River & Mercantile UK Micro Cap (RMMC), the departure of Philip Rodrigs, who has had phenomenal success with the fund since launch, sent the fund’s share price into a tail spin, losing a quarter of its value last week. The board says that George Ensor, who has been involved with the fund since launch, is taking over. Again, the implication is that it will be business as usual.

There is some overlap between the micro cap trust’s portfolio and Philip’s open-ended small-cap fund and so, if we see a flood of investors heading for the exit from the open-ended fund, we could see some pressure on the share prices of some of RMMC’s holdings.

The scale of the price drop on 7 February reflected, in part, the fact that RMMC’s share price didn’t budge when the world’s stock markets were panicking earlier in the month. The NAV had fallen by about 6% over the couple of days prior to the announcement. This helped move RMMC’s shares to an absurd premium - about 17%.

I know I keep banging on about the dangers of big premiums but this seems especially daft for a trust that has a record of handing you back cash at asset value. Now the shares are on a modest discount and they may stay there for a while.

The lesson from all this is that, no matter what management companies do to try to emphasise continuity of investment style across their businesses, investors care about who is running their money. Funds that are trading on premiums because their managers have attracted a fan base are vulnerable and investors need to factor in ‘key person risk’ to their investment decisions.

James Carthew is a director at Marten & Co, which also operates the Quoted Data website. The views expressed in this article are his and do not constitute investment advice.

 

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