Why do some fund managers attract a cult following?

David Prosser investigates whether they really are a guarantee of investment success

Neil Woodford's stellar reputation saw him raise well over £2bn from investors when he left Invesco Perpetual two years ago to set up his own firm (Rex)

The Warren Buffett show continues: this week, an anonymous donor agreed to pay £3,456,789 for the privilege of having lunch with the renowned investor, taking the amount the so-called ‘Sage of Omaha” has raised through annual auctions of a lunch date with him to more than $23m. In the investment world, Buffett is a star who stands head and shoulders above anyone else.

But are star fund managers really a guarantee of investment success? It’s a question many investors in the UK will be asking amid news that Woodford Investment Management is considering launching a new fund aiming to deliver above-average income from investments in UK companies. The fund management business is run by Neil Woodford, whose stellar reputation saw him raise well over £2bn from investors when he left Invesco Perpetual two years ago to set up his own firm.

It's not difficult to see why managers such as Woodford attract such a following. Over 25 years at Invesco, he genuinely delivered market-beating returns year-in, year-out – turning £1,000 invested into £25,349 by the time he left. Very few managers can hold a candle to his record – certainly not over such a lengthy period – and investors are prepared to pay for such consistency.

All the more so given the rank inconsistency generally of the investment industry. A report published in recent days by the BBC journalist Paul Lewis concluded that fund manager performance is so patchy that the conventional wisdom about the stock market outperforming cash over the long term may not be right. In fact, cash has regularly done better over the past two decades, Lewis found, and the average fund only won out for investors prepared to hold on to it for at least 18 years.

Nevertheless, there is always a worry that a star fund manager will lose their mojo. Take Anthony Bolton, the Fidelity fund manager who became a household name after delivering more than two decades of outstanding returns from his Special Situations funds, only to take an embarrassing pratfall with the launch of a new fund investing in Chinese shares, whose performance was decidedly less impressive. Or consider the strange case of Jayesh Manek, an amateur investor who shot to fame by winning successive Sunday Times fantasy fund manager competitions with incredible returns – when Manek began managing real money on a professional basis he attracted a big investor base thanks to his success, only for his funds to tank.

There may be all sorts of explanations for such falls from grace. Sometimes, star fund managers do fantastically well in one area of the market, but can’t replicate that success in another sector, particularly one which is very different. Anthony Bolton’s move from investing in Western companies to Chinese stocks is a case in point.

In other cases, star managers move on from the firm where they made their name and take large numbers of investors with them. These investors subsequently discover that the previous success wasn’t simply a one-man show and that without the same team behind them the fund manager struggles to repeat it. It would be unfair to accuse Woodford himself of that, though Patient Capital Trust, one of his new launches, has been extremely volatile so far (in line, to be fair, with the manager’s insistence that this is a vehicle for the long term).

Another problem is that star fund managers can become victims of their own success. Sometimes, they attract so much money from investors that the fund becomes unwieldy – with such huge sums to invest, the manager finds himself restricted to making certain types of investment.

It’s also worth thinking about what happens to these funds when, as is one day inevitable, the star manager moves on – to retirement, for example. Will you find yourself caught up in a panic rush for the exit in such circumstances?

Despite these concerns, however, most experts expect any new launch from Woodford to be hot property. ‘Anything with the Woodford name above the door is sure to garner fresh interest from investors, particularly if it comes with a higher income to boot,” says Laith Khalaf, a senior analyst at the financial adviser Hargreaves Lansdown.

That’s fine, as long as you’re investing for the right reasons. In the end, investors should be picking funds because they’re appropriate for their financial needs and aims, and suitable given their appetite for risk – not because they’re starry-eyed about the manager. In investment, the first rule is that “past performance is no guide to the future” – that goes for star managers too.

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