In a panel debate at the recent 6th annual Morningstar Investment Conference in London, Robin Stoakley, head of UK intermediary sales at Schroders, claimed that past performance was a good predictor of returns when assessing the performance of an individual manager and went on to say that this is the only concrete evidence we have of their ability. I thought this was an interesting point and one worth exploring further to see to what extent this held true and if so what lessons could we learn from this?
Testing the Thesis
I decided to use the IMA UK All Companies Sector as my sample to test this thesis. Admittedly this is just one of many sectors and may therefore not be representative of the universe of fund managers as a whole, but with over 290 funds it is certainly one of the biggest and, in the UK at least, remains a fairly dominant sector. The first thing to establish was how many of the funds in this rather large pool of funds have actually been managed by the same manager for more than 10 years. The result, while disappointing, is perhaps not surprising and probably merely a reflection of our times. Of the 296 funds in the IMA UK All Companies sector, I am afraid that less than 10% has been managed by the same fund manager for 10 years or more and interestingly only five of the managers have tenures of 15 years or more, according to Morningstar Direct™ data.
Outperformers Hard to Find
So of this elite group, how many were able to outperform the FTSE All Share Index over two consecutive five year periods? I’m afraid the result is an eye watering total of two! These are the M&G Recovery fund managed by Tom Dobell and the CF Walker Crips UK Growth fund, recently renamed the CF Liontrust Macro UK Growth fund and managed by Jan Luthman and Steve Bailey. I accept that the last ten years have been among the most challenging of most of our lifetimes. However, I would argue that with statistics such as these I would tread cautiously in relying solely on past performance as a guide to future performance and would stick to our approach at Morningstar OBSR, which is to focus on qualitative research and to use the numbers to inform our understanding and expectations of a fund.
Two Stand Out from the Crowd
The M&G Recovery fund is a specialist UK equity portfolio which offers a multi-cap approach with an emphasis on companies that are out of favour, in difficulty or whose future prospects are not fully recognised by the market. This approach leads the manager to invest in young companies and new industries as well as companies operating in more traditional sectors.
Tom Dobell has managed the fund since March 2000. His approach is contrarian in nature and long term in its investment horizon. This fund has performed well under Dobell’s stewardship, continuing a long and distinguished track record for this fund under only a handful of managers since its launch in 1969. Increasingly investors are questioning the manager’s ability to sustain his strong track record, given that this is now a very large fund and one of the biggest—if not the biggest—in the IMA UK All Companies Sector. We however believe that the manager’s contrarian and long-term approach is important from the point of view of running an all cap fund of this size and that his inherent investment style is well suited to this fund’s mandate. Furthermore, he also has the experience and resources required to gain a deep understanding of the companies in which he invests.
The CF Liontrust Macro UK Growth fund (formerly CF Walker Crips UK Growth) combines the skills of managers Jan Luthman and Steve Bailey and successfully blends a considered long term macroeconomic overview with bottom-up stock-picking. The successful identification of long term trends that are likely to influence markets and the willingness to stick with these over the long term has provided the fund with a tail wind that has enabled it to deliver strong performance through a variety of market conditions.
Luthman was in fact one of the speakers at Morningstar’s 2012 conference and suggested that pharmaceuticals are poised to take over the mantle from tobacco stocks, which have enjoyed a decade of outstanding returns and beaten most other sectors in the market hands-down.
Conclusion
Returning for a moment to my opening remarks, while I would not necessarily discount Robin Stoakley’s comments out of hand and would add that he is in the fortunate position of being able to view the world from a fairly unique standpoint of having, within his armoury, a talented pool of managers that has both depth and breadth and includes the likes of Richard Buxton, Matthew Dobbs, Andrew Rose, Jenny Jones and Justin Abercrombie. I would therefore agree with him that good managers are often able to produce good returns, but would issue a health warning when considering the extent to which past performance is always and everywhere a good predictor of future returns.
Catch up on the highlights and manger interviews from the recent Morningstar Investment Conference here.
