Active fund managers: are two heads better than one?

Some investment funds are managed by a single manager, often with the support of a team of analysts, while others are co-managed by a pair. Co-managers argue that, as no individual can know everything, it’s better to have two managers running a fund. But are two heads really better than one, or do too many cooks spoil the broth?

Research in 2010 on investment clubs found that the best-performing clubs tend to be those comprising dissimilar people. Professor Brooke Harrington, at Copenhagen Business School, found that investment clubs that consist of people from different walks of life, and different genders and ages, tend to make better investment decisions than, and outperform, groups of like-minded friends.

She concludes that this is because diverse clubs benefit from ‘informational diversity’ – the wider range of ideas they generate for investments and the high likelihood that club members will disagree about them. Her study confirms previous experiments carried out by social psychologists showing that diverse teams perform better than homogenous ones.

Seven in 10 funds fly solo

Out of 384 funds in the UK all companies, UK equity income and UK smaller companies sectors, 270 are led by solo fund managers, 88 funds are managed by a pair of co-managers and 26 are managed by a trio, according to Morningstar data. In percentage terms, 70 per cent of funds in these three sectors have a single manager at the helm.

There are several reasons why this is the case, according to Andrew Clare, chair of asset management at Cass Business School. ‘Some fund houses promote the idea of team management, so that if the manager leaves, it’s not a problem. However, I suspect that in many cases team-managed funds are actually run by one key person,’ says Clare.

He makes the further point that boutique firms are often set up by one or two managers with reputations, so it’s those individuals who tend to attract business rather than the notion of a team. As a result, smaller fund houses are more likely to promote the merits of funds run by a single manager. Clare explains: ‘Co-managers might split the process. One might focus on asset allocation, for example, while the other might concentrate on stockpicking. Alternatively, they may stick to different sectors.’ However, he adds, reaching a final investment decision might be more complicated for co-managers.

A case for co-managers

To find out how two managers of a fund reach a decision together, we spoke to Andrew Wheatley-Hubbard, who has managed BlackRock Global Income with Stuart Reeve for the past five years. Wheatley-Hubbard says: ‘We don’t divide roles much in terms of senior or junior. We try to share everything so that there’s a degree of continuity.’ He states that when discussing a new stock idea, all 13 members of the team are invited to contribute their views. ‘Everyone is welcome to talk, but the decision comes down to Stuart and me.’

He adds: ‘Things do get massively heated between the two of us, though, when we disagree.’ But they have learnt to work together. ‘The debate has to be frank. You have to be able to tell the other he’s a moron [knowing that] when you walk out, that doesn’t influence the next debate.’

Once they’ve decided to invest in a stock, they make a call on how big the position will be.When making investment decisions, ‘behavioural biases are much easier to spot in other people [than in oneself ]’, and that, he says, is the advantage of having more than one manger running a fund.

Commenting on their differences, Wheatley-Hubbard says he tends to be more active than his co-manager. ‘I have a tendency to want to trade more than Stuart does, so if he’s not around, I ask myself what Stuart would say, and trade less. ’One common bias relates to confidence: being overconfident or too cautious. Wheatley-Hubbard acknowledges that he tends to prefer defensive stocks while Reeve likes cyclicals, so stock bias tends to be evened out. ‘We would always want to be greater than one,’ he adds. He argues that a third manager might add value, but with four or five people, dynamism and accountability begin to wane.

Team spirit

While fund managers are happy to talk to us about the advantages of working together, no solo fund manager would go on record to say that they prefer to make decisions on their own and would rather not work with someone else.

The key question, of course, is whether joint managers tend to outperform solo ones. But one rating agency and two investment platforms we approached did not want to compare the performance of solo managers with pair-managers, on the grounds that the results would not be representative.

It seems the industry as a whole has no interest in taking a position on this matter. However, a robust academic study on this subject has been done in the US. In 2016 professors Sergei Sarkissian, at McGill University, and Saurin Patel, at Ivey Business School, studied the performance of solo-managed and team-managed funds. Their analysis of some 4,000 US investment funds shows that team management does lead to better investment performance.

Sarkissian says: ‘We don’t know if these teams are vertical or horizontal in their decision-making, but on average, team-managed funds outperform single-managed funds by 0.3-0.5 per cent a year.’

He argues that teamwork ‘reduces a fund manager’s propensity to pump up their performance at the end of the year’, and that team management decreases behavioural biases, especially the over-confidence that manifests itself in ‘useless trading’. In other words, teams are less likely to overtrade, and they incur fewer charges as a result.

Three proves optimal

Intriguingly, the study also found that ‘three member teams generate the highest returns relative to single-managed funds’. This echoes psychological studies showing that three-member teams are optimal. That is because they provide diversity of opinion, while the additional cost of coordinating three people is relatively low.

Sarkissian says: ‘If my task was to move 100,000 bricks from one part of a city to another, I would want as many team members as possible, but the kind of work fund managers do seems to benefit from [teams of ] three.’ One such trio is the management team of the TB Amati UK Smaller Companies fund, one of Money Observer’s 2017 fund award winners.

David Stevenson, one of the three managers, says each of them focuses on a range of sectors, according to their backgrounds and interests. They have about 50-60 holdings, which means each manager is responsible for about 20. Managers do the legwork in the sectors they are responsible for, from research to visiting companies, before presenting a written 500-word conclusion to the other two team members.

‘Sometimes there are three green lights,’ he says. ‘If one manager is against it, he can be persuaded to go ahead. If two are against it, we decide not to pursue the idea.’ He adds: ‘With one manager, you get more personal bias, because people fall in love with their stocks. They hold on to them for too long. But with three people you improve your chances of uncovering the blind spots.'

Experts’ pair-manager fund picks

Ben Willis, head of research at Whitechurch Securities, recommends Schroder Recovery/ Schroder Income run by Nick Kirrage and Kevin Murphy. He says: ‘It is hard to believe these two relatively young managers have been lead managers on these funds for more than seven years.’ He adds that, because of their deep value approach, ‘they are o¬ en contrarian in their stock positions, and there will be periods in the market cycle when their style is out of favour’.

He also recommends Henderson Strategic Bond, which has been managed by John Pattullo and Jenna Barnard for more than a decade. ‘The managers invest in all types of bonds from government to corporate bonds and across the risk spectrum, holding investment-grade and high-yield bonds,’ he says.

Darius McDermott, managing director at FundCalibre, picks JOHCM Asia ex Japan. Singapore-based Samir Mehta and Cho-Yu Kooi manage a portfolio McDermott describes as ‘unconstrained’ and ‘highconviction’, which invests in companies across all market capitalisations’. He also recommends F&C MM Navigator Distribution, a fund of funds run by Gary Potter and Rob Burdett, who have worked together for more than 20 years. He says: ‘By their own admission, the key to their process is their team, which has stayed together through three different businesses.’

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