The butterfly effect: understanding star manager risk

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2 Sep 2015

What should investors do when the star manager running their money ups and leaves? Emma Cusworth considers the options.

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What should investors do when the star manager running their money ups and leaves? Emma Cusworth considers the options.

THE EXIT STRATEGY

How do investors protect themselves from this butterfly effect? By thinking ahead and having an exit strategy in place well before it is needed. Arguably, this should form a critical part of the initial due diligence when an investor is looking at investing with any high-conviction manager.

Chris Adolph, head of transition management EMEA for Russell Investments, warns: “In large, concentrated portfolios, stocks can react much more significantly to news of that manager’s departure.”

Gelber advises clients demand an open and transparent relationship or partnership with key investment individuals. “Establish a framework and common understanding on how to deal with the flow of information around disruptive events such as a manager change,” he says.

Understanding the degree to which an individual has control of a portfolio and the wider investment process is critical in being able to identify where a manager departure is likely to be particularly disruptive. And, according to Mercer’s Clarke, the role those individuals play in the wider corporate culture cannot be ignored.

“Is a firm run as a star-manager culture? If yes, it’s important clients really understand what they will do if that manager leaves,” she says. “Did that manager really own the process? If yes, get out and you don’t want to be a late leaver.”

Adolph agrees on this last point. “If you’re going to fire a manager, it’s better to get out sooner rather than later,” he says. As soon as the news of a departure is public, there will be downward pressure on those stocks in anticipation that some investors will want to change their manager. “It can take a long time for securities to recover from this and those who act slowest often take the biggest hit,” Adolph says, adding: “Six months on the loss in value can be difficult to ever get back.”

Getting out fast means being prepared though, hence the need to identify star manager risks as early as possible. As institutions continue to favour high-conviction managers in their active portfolio allocations having an exit strategy already mapped out becomes increasingly paramount.

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