At his retirement two years ago, UK equity veteran John Woods declared he was stepping away from his biggest legacy – the JOHCM UK Opportunities fund, which he had managed since launch in 2005 – in the knowledge ‘that the portfolio is in safe hands’.
Two years on, it appeared that a significant number of his investors, who at the time of his exit had £1.8 billion invested in the mandate, did not share his confidence. In its full-year results last week, JO Hambro said the fund experienced £700 million in redemptions in 2018 alone, with assets dwindling to £454 million.
This may be the more surprising because Woods had developed a quintessentially replicable and repeatable process, overseen by two lead managers with a cumulative 11 years’ experience running it and a long history of delivering consistent incremental alpha.
So if one of the steadiest prospects in UK fund management can see the best laid succession plans come unstuck, how are fund buyers currently handling key manager risks?
City Asset Management research director, James Calder, who has stuck with the UK Opportunities fund, said his litmus test is repeatability, offering JP Morgan’s highly systematic European strategy as an example of a fund he would stick with regardless of the individual in the driving seat. ‘It’s about the process, not the individual, and this is why we have bought into it.’
He similarly remained in River and Mercantile’s UK Smaller Companies and UK Income funds after manager Richard Staveley joined Majedie. ‘We were comfortable with the process, and we took the view that people are important, but so is process.’
In the case of Wood’s UK Opportunities fund, he guessed there was some style bias in investor willingness to cash out of the historically defensive fund. Large cash holdings, currently at 23%, have caused certain discomfort among investors for some time, according to Calder, so Wood’s departure gave unit holders a moment to crystallise an underlying readiness to move.
As that illustrates, guarantees of stability do not necessarily mean investors will stay put. Even a long-awaited departure can force clients to reassess their decision of holding money in a specific fund and bring to surface concerns that previously lingered in the background, said AJ Bell’s fund selection head, Ryan Hughes.
‘People have inherent biases in the way they think, so natural disturbance events force them to re-evaluate their thinking because it’s easy to justify it at that point and persuade themselves,’ he said. ‘Sometimes it becomes habitual – there are mangers people have used for a long time and [they] trust them, so they end up backing them.’
Relatively smoother recent transitions – at least so far – include the retirement of Nigel Thomas of Axa’s UK Select Opportunities fund last month, and Fidelity’s Ian Spreadbury, who ran the blockbusting MoneyBuilder Income and Extra Income funds, at the end of 2018.
Both were replaced by their deputies, and their respective companies informed clients years in advance, allowing the necessary time for relationship-building and getting used to the new faces.
Hughes also places weight on the people behind a strategy, especially for funds with a key manager risk. ‘We want to understand the manager’s investment philosophy and process,’ he said.
‘We are looking for continuity between what the lead manager is saying and a consistent way of thinking for the wider team so that this investment approach will continue when they decide to leave.’
Retirements aside, the industry agrees that firm-hopping is far less frequent now than it was 15 years ago, as fund houses have become better at tying managers in with long-term bonuses, revenue share agreements and other perks.
Unplanned walk-outs do happen, however. ‘One of the big issues, especially if it’s a sudden departure of a well-known manager, is how quickly money might leave that fund,’ Menges said.
‘Some people can give it time – three to six months – to see what happens, while others will leave immediately. You have to watch a sharp outflow, as they make it difficult for the remaining team to handle the situation with everyone heading for the exits.’