Although the research indicates that around two-thirds of the managers who switch companies outperform on a five-year timeline, Caquineau says this statistic is misleading due to survivorship bias in the data.
Only the fittest survive
Essentially, the fund managers who switch company and then underperform are likely to be fired before the five-year time horizon is reached, meaning that if one crunches the numbers on a five-year time horizon, it is more likely that only the successful ones will be included.
Caquineau says performance outcomes were not dramatically different across asset classes.
He says: “As alpha generation is a mix of luck (plentiful) and skills (scarce), it's not surprising that we don't find a strong relationship between alpha generated at the first firm and at the subsequent employer. The data shows a great variability around the mean: managers with a great track record at their initial employer may end up destroying value at the new firm and, conversely, fund managers with poor track records initially may improve considerably under a new banner.
“There are a few managers who successfully transitioned to their new firm and continued to generate excess returns for investors, but relying purely on initial track record to identify the best ones to follow looks like a loser's game. Other considerations can improve investors' chances of success, such as alignment of interests at the new firm, cultural and investment philosophy fit, level of resources, team dynamics and fees.”
Caquineau says one of the reasons why managers who left an employer following a period of underperformance could do better at their next company is that the investment style they deploy could come back into fashion.
He cites the example of a fund manager who deployed the value style would have sharply underperformed in 2020 and 2021, if at that point they switched company; their 2022 performance, when the value investing style was to the fore, would have been excellent.”
More broadly, Yearsley says: “On the question of resource, it is of course important but it isn’t necessarily about the number of analysts they have, but also the quality. I think since the Woodford debacle people are a lot more wary of investing in firms started by fund managers themselves.
“The other consideration for me would be that I would be reluctant to invest in a manager that has been out of the industry for a while.”
Philip Milton, who runs PJ Milton and Co, an advice and investment management company in Devon, says: “In the vast majority of instances, we are stayers. If we liked the fund, the assets within and style and the new management is continuing the theme, we’d stay.”
