Even the best fund manager needs checks and balances to prevent serious mistakes.
- Maximum investment flexibility isn’t necessarily a route to high returns
- The risk management side of a boutique asset management group needs to be managed effectively
- Talented managers still need someone who will tell them ‘no’
It would be odd to suggest that every asset manager needs the protection of a large asset management group to manage its regulatory responsibilities, but it does seem that ‘star’ fund managers, let off the leash, don’t necessarily do as well as you think they would do.
The risk management part of any fund manager’s presentation is not usually the part to which people pay most attention. Investors are generally looking for talent rather than an indication that the fund manager is ticking all the right compliance boxes. If anything, too much regulation is often seen as a barrier to progress. Left well alone, fund managers could express their ideas clearly and with vigour.
It turns out this isn’t quite the case. Alexander Darwall was a brilliant investor for many years at Jupiter. Yet given the freedom and flexibility to manage exactly as he sees fit, he has run into a problem with Wirecard. His European Opportunities Investment Trust dropped over 11% following an accounting scandal at the payments maker. At one point, he held up to 17% of the trust in the failed company – allowable within the investment trust structure - though this had fallen to nearer 10% at the time of sale.
It could be seen as an isolated example, a short-term blip in an otherwise largely unblemished career. However, it has some echoes of the problems seen at Woodford Investment Management. Almost certainly, it was not that Neil Woodford’s stock picking skill eluded him once he left the confines of a major fund management house, but that ‘boring’ things such as risk and liquidity weren’t managed effectively.
These high-profile active management problems show the importance of checks and balances. While there are real advantages to the boutique culture – freedom from investment committees, marketing meetings and the pressures of asset gathering – the one-man band asset manager comes with problems. Notably, who says ‘no’?
No fund manager is an island. It helps to have a team of equals with whom to discuss ideas. And if your peers won’t provide that balance, your compliance department should have sufficient power and authority to do so. This important process often doesn’t happen when one person is dominant. People are still wary of questioning the person who pays their wages.
While every talented manager thrives on a certain intellectual freedom, it is worth ensuring this freedom still comes with the appropriate checks and balances, particularly for the ‘lone wolf’ asset manager.