It seems that the woes of New Star, the high profile new boy on the fund management block, worsen by the day. It seems like only yesterday, or last year, that New Star could do no wrong. Their right ups in the Press were glowing and public and advisers alike rushed into their well performing funds. Now, its funds languish at the bottom of performance tables, managers are reshuffled between funds and its shares disappoint.
This is neither the time nor the place to analyse the exact reasons for New Star’s travails, which may be short lived, but there are lessons to be learnt from their fall from grace.
Out performance of the market can only come through either manager skill or manager luck. As with Napoleon’s generals, it seems that it is better to be lucky in the fund manager world. Manager skill is notoriously difficult to isolate and the marketing machine puts a lot of effort into persuading that positive results stem from skill rather than luck. This, it seems, plays into the hands of much of the public and their advisers because there is comfort in believing that the person managing your money has a special skill. In order to outperform the market, a manager must make bets by holding investments in a way which are different to their weighting in the market. I do not think much of granny’s money would wing its way into a fund were the advertising emphasised that the manager had been very lucky with his bets of late. No, what the public seek is skill, any sap can be lucky. Skill is worth paying for, luck is not.
The problem with luck is that it turns. It also cannot be engineered, it is all down to chance. So, if stellar performance turns out merely to have been luck, as it usually is, there is nothing for it but to await its return.
None of which brings any comfort to those who bought into the skill story only to find it was down to luck. Someday, perhaps, investment management groups will have to warn investors that any outperformance can only be attributed to luck. Another reason to stick to tracker funds.
