One of the UK’s most popular active fund managers, Richard Buxton, announced last month he is leaving Schroders for Old Mutual. His £3.5bn UK Alpha Plus Fund has performed well by conventionally accepted standards and is ahead of its FTSE All Share benchmark over most time periods. People who hold Mr Buxton’s fund might be wondering, therefore, whether to follow the star to Old Mutual. Schroders is so concerned about an exodus it warned that up to £1bn was at risk of switching or redeeming.
But how many investors really think about what drives good performance? How many really know whether they are buying the man or the market and which is more reliable in the long term?
Mr Buxton’s fund, for example, is billed by Morningstar as one that buys large companies with no particular bias towards value or growth shares. But it has a distinct tilt towards smaller companies than the market average it is measured against.
This means when small companies outperform the wider market, as they tend to do over time, Mr Buxton’s fund will probably also outperform. This is good for investors in the fund who share this outperformance but, given the fund’s billing as a large companies fund, they may be unwittingly exposed to more risk than they expect. And given that investors in smaller companies can expect higher returns for taking that additional risk, they might want to compare the fund’s performance to them rather than the whole market. On that basis, the fund’s performance is very much as you might expect.
This is not to say that Mr Buxton is not a skilled investment manager and should not be followed, or that his successors cannot continue his good track record. The point is simply that successful investing is often more about understanding the sources of market return (and how to capture them in a systematic, low-cost way), than it is about picking a star manager and hoping to ride on their coat tails.