When it comes to evaluating funds, just how important a consideration is fund manager tenure – that is to say, the length of time somebody has been at the helm of a particular portfolio? It is a question that crops up with a fair degree of frequency – including at a recent investment conference organised by Citywire and at which we were speaking.
An electronic voting system enabled the audience of UK-based financial advisers to express their thoughts on the matter and the overriding view turned out to be that, yes, fund manager tenure was a very important consideration. It also emerged that the audience members themselves had averaged around two decades of experience as financial advisers so how did fund managers do by comparison?
Not great, would be the short answer while the slightly longer one can be seen in the chart below. It plots, courtesy of data Citywire holds on its universe of 17,000-odd funds, the experience levels of fund managers – from the 91.1% who can boast a whole 12 months in charge of a portfolio to the 1.1% able to match the 20 years or so averaged by that audience of advisers.
Source: Citywire September 2014
It is striking how steep the drop-off rate becomes over time, with under a fifth of fund managers surviving to celebrate their tenth anniversary. This has to play on some managers’ minds and may help to explain the index-hugging and consensus views so often seen in investment. Unfortunately, doing what is right by your investors is not always consistent with doing what might keep you in your job.
Another interesting point to note on the chart is that roughly a third of managers have less than three years’ experience on their fund. Plenty of fund selectors will place an inordinate amount of emphasis on three-year performance numbers and yet clearly there will be times when part of that performance is not attributable to the incumbent. So how often is this taken into account?
Fund selection is not exactly our specialist subject here on The Value Perspective yet we have always assumed manager tenure and performance to be equally important. After all, surely you need to know whether the past performance you are looking at came from the person currently in the job or their predecessor. It is intriguing to think some people may somehow be differentiating between the two.
Speaking of differentiation, there is also the question of working out how much of a fund manager’s performance may be put down to skill and how much to luck – after all, the longer someone has been doing their job successfully, the more one can reasonably assume at least part of that success is down to the former quality rather than the latter.
Warren Buffett, for example, has suggested it is only when someone has notched up a 10-year track record that you can reasonably begin to ascribe their performance to some aspect of process or skill. If the above chart is right, however, that does mean fewer than one in five fund managers may be relied upon any more than, say, throwing darts at a copy of the Financial Times.
This subject has been addressed by Michael Mauboussin, one of The Value Perspective’s favourite thinkers on value investing, in his 2012 book The success equation: Untangling skill and luck in business, sports and investing. That had its origins in a Legg Mason strategy paper, which – if Mauboussin’s publishers have not had it taken down – you may still be able to read here.
One of the points Mauboussin makes and on which, inspired by a Wimbledon final, we picked up a few years ago in Netting returns, is that a good way to work out the degree to which luck plays a part in a game is to consider how straightforward it would be to lose on purpose. In tennis, for example, you could manage that quite easily but investment is a different matter entirely.
That is because whilst there is in fact an element of skill in investment there is also a huge element of luck and it would actually be quite hard to construct a portfolio you could guarantee would underperform over, say, the next three years. Investing is a 'game' where skill does come to the fore but only over long periods – the flipside of Buffett’s point above is that an investor’s true ability cannot be gauged over the short term.
As we noted in our own piece, the reason value investment is such a powerful strategy is it has more than 100 years’ worth of history showing it can outperform. The long-term nature of this track record is the factor that makes it so compelling. Investment strategies come and go but, given time, the best will rise to the top.