In the world of sport, a phrase bandied about on a regular basis is that ‘form is temporary, class is permanent’. Does this hold true when a fund manager is going through a rough patch?
The consensus view is that fund managers cannot be expected to outperform all the time – they are human after all, so mistakes will be made. In addition, there will also be periods when their style will fall out of favour.
Normally when a fund manager underperforms, they hide and hope their investors haven’t noticed. It is rare that the opposite plays out, and even rarer that as well as offering up an explanation for the spell of poor performance there’s also an apology. But last week Neil Woodford, the highly regarded fund manager, said sorry for his spell of underperformance over the past 18 months or so.
Woodford even responded to critics who asked whether he had ‘lost it’. ‘Investors are free to believe I have lost it,’ he said, ‘but I don’t believe I have lost it. I believe I have the right portfolio [and] the right strategy to deliver the right returns to our investors over the medium and long term.’
A handful of other fund managers over the years have also made a public apology. Below we explain why, and assess whether performance improved. Performance figures quoted below are sourced from FE Trustnet.
Regarded as one of the best investors of his generation, Anthony Bolton steered the Fidelity Special Situations fund to annual returns of around 19 per cent during his 28 years at the helm. Bolton stepped down in 2007 before returning to fund management in April 2010 to run the Fidelity China Special Situations investment trust – a market he had not previously invested in.
However, Bolton struggled to replicate his stock-picking success overseas, leading him to issue an apology to investors in November 2011 after the fund slipped 28.9 per cent into the red between March and September that year. At the time he told shareholders that this optimism on China had been ‘severely tested’.
What happened next? Fidelity Special Situations managed to just about turn a profit by the time Bolton retired at the end of March 2014. Since Bolton’s departure performance has improved, but to put this into context it should be noted that China’s stock market has been buoyant, whereas under Bolton’s reign overall market conditions were much trickier. Since Dale Nicholls took over, the trust is up 120 per cent.
Prior to 2010 Tom Dobell, manager of the M&G Recovery fund, outperformed the stock market for ten consecutive years before performance took a turn for the worse. In October 2014 he issued an apology to investors, stating: ‘we are very aware the fund has lagged the market in recent times, and I am sorry for that.’
Dobell, however, insisted he would not change his investment style, which is to buy out-of-favour shares that are ‘unloved’ by the market. Dobell targets companies suffering from a specific problem that he believes is temporary in nature and will at some point be resolved, which should then lead to a recovery in the share price.
What happened next? On a seven-year view M&G Recovery has been one of the worst-performing UK equity funds, up just 26.1 per cent while the average rival fund in the Investment Association (IA) UK all companies sector has returned 67 per cent. Since the start of October 2014, around the time Dobell apologised, M&G Recovery has returned 16.4 per cent versus 29.7 per cent for the sector average.
There’s been an improvement evident since the start of 2016, with the fund showing a return of 25 per cent against 21 per cent for the sector average, but it has not returned to its former glories.
Rhodes is another manager from M&G’s stable who took the unusual step of apologising, writing an open letter to investors. He has overseen the £6.5 billion M&G Global Dividend fund since its launch in July 2008. In the letter, dated January 2015, he noted that ‘open admission of failure in this industry is rare’ and offered up four reasons why the fund underperformed in 2014 – including the ‘speed of the decline in the oil price’.
What happened next? Performance has been more steady than spectacular. Since the start of 2015 the fund is up 43 per cent, while the average global fund (the sector it sits in) is up 48.8 per cent. If the fund had pitted itself against more like-for-like, income-oriented funds in the IA global equity income sector, it would have returned exactly the same as the sector average return of 43 per cent.
During the financial crisis Carl Stick’s Rathbone Income fund was one of the worst performers among UK funds, losing 34 per cent in 2008. He was not alone in losing money that year, but he does stand out in being one of the few fund managers who have spoken candidly about the mistakes made and vowed to learn from the experience.
In short, Stick admitted too many of his holdings were highly leveraged and promised to take a more risk-based approach in future – buying quality businesses at the right price. Reflecting on the credit crunch in an interview with trade title Fund Strategy in October 2012, Stick said: ‘I’m sorry we lost that money, but you learn by experience.’
What happened next? Rathbone Income has been a consistent outperformer over the past seven years or so. Since the start of 2010 the fund is showing a return of 129.9 per cent versus the IA UK equity income sector return of 103.6 per cent.
Regarded as one of Britain’s finest stock-pickers, Nick Train held his hands up earlier this year and apologised directly to shareholders when one of his biggest holdings – Pearson – fell heavily after moving to cut its dividend. At the annual general meeting for the Finsbury Growth & Income Trust (FGT), Train said he was ‘sorry about the situation’.
What happened next? Train has retained his holding in Pearson, the education company. Over various timeframes, short and long, FGT is ahead of both the competition and the wider market. On a 10-year view, FGT is up 222.8 per cent, while in contrast the average UK equity income trust has produced gains of 68.3 per cent.
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