Do Star Managers Exist?
- 10 hours ago
- 4 min read
“Everyone here wants to be the next Warren Buffett.” My colleague said this to me as I sat down at my desk when I first arrived in London.
The firm had just hired a new fund manager, Mr. T, from another company. Like the character in Rocky III, this Mr. T had heavyweight status and star appeal. He had previously run a very popular UK equity growth and income fund, and my firm had managed to hire him away.
My colleague said he desperately wanted to work in Mr. T’s new UK and European equity team. Everyone wanted to learn from him and, perhaps, become the next Warren Buffett. After all, he had the reputation of a great stock picker with near-legendary skills.
A few months later, my colleague successfully moved to Mr. T’s team. Assets under management in Mr. T’s funds continued to grow. He was admired throughout the company, by advisers and by clients alike. He used his investment style and process to launch additional funds, including strategies investing in Europe and in smaller UK companies.
Mr. T also launched a long-short equity fund. My colleague was delighted to be part of the team running it. Because of Mr. T’s reputation, the alternative investment fund received seed capital quickly. Within less than a year, it had grown to more than £100 million, attracting money from private banks and fund of funds.
I did not move to Mr. T’s team. I preferred portfolio analytics and risk management. Some others on my team were assigned to use quantitative models to analyse third-party funds for our company’s private wealth team. For governance reasons, they also had to review our own funds.
The year was 2000. The fund analysis team reviewed several European equity income funds, including one run by Mr. T’s team. These funds were supposed to focus on solid stocks with good dividend yields that also looked undervalued. But as my colleagues analysed their performance against different factors, they found something unexpected: the funds had a strong tilt towards growth, with very little exposure to dividend and value factors.
That included the fund run by Mr. T’s team.
We raised the findings with the manager.
“Internet is the next biggest thing. You must invest as they are cheap now.”
“What about dividends and the investors’ need for income?”
“Don’t you see we keep some energy stocks? And we are using corporate bonds. Our company research will support the selection of corporate bonds. Besides, our fund mandate allows that.”
We began to see similar style drift in Mr. T’s flagship funds too.
Then came the next shock. No, it was not the bursting of the internet bubble. That came later.
Mr. T was headhunted by another company. He left — and took his entire team with him. The flagship fund then saw relentless outflows as advisers moved client money into Mr. T’s new funds at his new firm.
My colleague, however, decided to stay. After all, he could now become the star manager of the long-short equity fund.
Six months later, the internet bubble burst. Then came September 11. My colleague’s long-short equity fund was caught on the wrong side of several stock selections. Performance fell sharply. Redemptions continued. The fund was suspended and then closed in early 2002.
Mr. T’s new ventures were also unsuccessful. He and his team soon became forgotten stars.
That period of my professional life shaped the way I have thought about fund managers ever since:
I am always interested in whether a manager is delivering skill or luck. To this day, I am still not sure whether Mr. T was lucky or genuinely skilled. That is partly why I developed AlphaPredictor® Insights with Parala Capital.
Even if Mr. T was skilled, his success did not survive the end of the internet bubble. Perhaps he was well suited to a growing economy but struggled when conditions changed.
When a manager becomes successful, there is often a temptation to try new markets or styles. Is that a way of protecting a reputation in case the cycle turns, or does success sometimes breed complacency?
The investment team and the culture around it may matter more than the individual. Perhaps my colleague was successful because of the people around him, and the ideas he could test with them.
Does this mean there is no value in actively managed funds? No. It means we need to recognise that managers must navigate different phases of the business cycle. Some are skilful when inflation is low. Others are better in recessionary environments that suit their style and sector preferences. Identifying managers who are skilful in navigating the business cycle also helps us identify those managers with true all-weather stock selection skills. Diversifying across different types of skills can add value for clients.
The real question is not whether star managers exist, but whether their apparent star quality is durable, transferable, and repeatable when the market regime changes.
James Chu, CFA
Head of Investment Solutions
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