The average time spent as a fund manager is seven years.
For the past couple of years, the global economy has been described as ‘just right’ – the so-called Goldilocks scenario. But, as parents and grandparents know all too well, Goldilocks is eventually confronted with a family of bears, and the same fate is likely to befall stock markets following their nine-year bull run.
The good times may already be over, given the mixed returns seen in developed markets since the start of the year. One thing is certain: the business cycle is in its latter stages, and various professional investors are positioning themselves for the next phase, which is expected to be a bumpier ride as the era of loose monetary policy draws to a close.
‘Each market cycle throws up different challenges. The withdrawal from the quantitative easing experiment will call for cautious portfolio positioning,’ notes Damian Barry, senior investment manager at Seven Investment Management. Barry’s stance is echoed by other investors, among them Peter Elston, chief investment officer at Liverpool based Seneca Investment Managers, and Paul O’Connor, head of the UK-based multi-asset team at Janus Henderson.
According to Elston, the business cycle remains in the expansion phase, but he predicts that by the end of 2019, it will peak. The following stages of the cycle involve contraction, and with it possible recession. The final phase, the trough and subsequent recovery, will then play out, handing investors opportunities to pick up bargains once again.
‘Ahead of the expansion peak, we will be reducing our equity exposure from 60 to 40 per cent,’ says Elston, ‘because once the business cycle enters its next phase, equity markets will become choppier as volatility becomes more prevalent.’
O’Connor agrees, remarking that the ‘low volatility era for equity markets is now over’. He adds: ‘While it is too early to say the bull market is over for equities, the beginnings of a regime shift are playing out, away from markets being driven by loose monetary policy. We are moving into a world of lower returns and away from what has been a sedate phase for equity markets.’
However, the predicament facing all three investment strategists – as well as private investors who buy active funds – is the issue of managerial experience. The short-term nature of fund management leads firms to chop and change managers frequently if performance is not deemed up to scratch. According to research exclusively provided for Money Observer by adviser Tilney Bestinvest, the median total career tenure for fund managers, taking into account job changes, is a mere seven years. There are therefore many fund managers who have barely experienced a business cycle.
It is of course worth noting that individuals rarely step straight into a lead fund management role, and will usually spend several years as research analysts or assistant fund managers prior to this. But even so, that seven-year tenure is alarmingly short, particularly when investors are being encouraged to invest with a time horizon of at least five years.
Jason Hollands at Tilney Bestinvest says: ‘The median manager has clocked up their track record in a highly unusual market environment where vast amounts of central bank liquidity across the globe – through quantitative easing and ultra-low interest rates – have driven risk assets higher and led to a very long-in-the-tooth bull market in risk assets with high levels of correlation.’
Moreover, many fund managers are untested in distressed markets, or indeed ‘normal’ markets, when stock fundamentals might count for more than they have of late. In recent years, valuations have barely mattered as the flow of cheap money has propelled stocks relentlessly higher.
Hollands says: ‘All this will change, as the tectonic plates of monetary policy are shifting. The US is ready to reverse its QE programme, and other central banks are edging away from stimulus. It was noticeable that 10-year US Treasury yields passed 3 per cent at the end of April; higher bond yields must ultimately have consequences for equities.’
So should investors seek managerial experience? All three investment strategists argue that a price cannot be put on experience, with Barry leaning towards fund managers who have seen two or even three market cycles. Spotting turning points in the market, he says, requires experience.
Barry adds: ‘What is interesting right now is that historically, at this time in the market cycle, defensives would be looking attractive from a valuation perspective. Yet they are currently priced for perfection. They are expensive in historical terms, so future upside may be limited.’
Nonetheless, Barry favours the Majedie UK Focus fund, which he describes as a defensive fund with a value bias. On the investment trust side, Seven Investment Management likes RIT Capital Partners. The trust is often described as a wealth preservation fund because of its cautious stance. It has just under 10 per cent of assets held in gold.
O’Connor names Jupiter UK Special Situations and TwentyFour Dynamic Bond as two funds run by managers who have stood the test of time. He says: ‘Ben Whitmore, who runs the Jupiter fund, has delivered impressive performance over the past decade, delivering 3 per cent alpha a year with lower volatility than the FTSE All-Share index. On the fixed-income side, TwentyFour Asset Management was founded amid the carnage of the great financial crisis, an experience that should stand the team in good stead for any upcoming volatility.’
O’Connor adds that some fund managers who have thrived during the nine-year bull run ‘have barely seen interest rates go up’. Moreover, even fewer fund managers have managed money when bond yields have been rising for some time.
Scott Wylie, an investment manager at Mattioli Woods, stresses the importance of mixing and matching different fund styles. He notes that diversification will become even more important, given the expected pick-up in volatility.
Not everyone, however, agrees that on-the-job experience guarantees a safe pair of hands. Tom Becket at wealth manager Psigma warns: ‘We respect fund managers who have outperformed in previous business cycles, but we think the past is not prologue. Instead, we focus on having the right asset allocation mix, as well as look for future fund stars. Over the past couple of years, investors who backed some of the most experienced names, such as Neil Woodford and AXA Investment Managers’ Nigel Thomas, will have been disappointed with how they have performed.’
There’s also an issue of fund size, given that fund managers who have been running money for decades tend to be highly coveted and as a result run large amounts of money. ‘There’s a premium on grey hair in this industry,’ says Elston. ‘We are wary of investing in big funds, as the more money a fund manager runs, the less nimble they can be when buying and selling.’