Killik Explains: Why investing stars eventually fade
By: Tim Bennett
20.06.2019
Three factors usually lie behind the fall of an investing giant such as Neil Woodford says Tim Bennett in his latest video.

Why investing stars eventually fade

Once mighty money managers and investors can be brought down by any one of three factors, or a combination of them. Here is a short summary.

Background

Memories are short in financial markets. The spotlight has recently fallen on Neil Woodford, after he suspended trading in his flagship equity fund. And only a few years ago investors were ruing the perplexing loss of form of Anthony Bolton, a once-legendary name, as he strayed into Emerging Markets, having previously been a largely UK investor. They are far from alone. The key question is; what goes so badly wrong for otherwise bright, hard-working and hitherto successful people?

The culprits

I would argue that three forces can start to work against once bullet-proof investors;
Let’s take each one in turn.

Hubris

Much has been written on this topic (by Dr David Owen amongst others) which can be distilled down to the danger of getting “too big for your boots”. Success breeds success, as the cliché goes. However, it can also breed overconfidence, arrogance and even a bit of complacency as the good times roll, seemingly unending.
The problem is compounded when subordinates and direct reports will only tell a star performer what they think they want to hear, rather than give an independent view. The result is an ivory tower mentality that can become divorced from the real world.

The environment

Another problem with being successful is sooner or later (usually sooner) other people take notice and start to try to emulate what you do. As such, star investors sometimes lose their edge as their investing “secrets” leak out. In some cases, what was once a brilliant investment strategy that exploits an existing anomaly can become tired as markets move on and evolve. In short, the danger is that the world changes, but a fund manager then cannot. Or, in the case of Woodford, they do so but with disastrous consequences as they drift away from a mandate where they once did have a lead and start dabbling in new parts of the market where they do not.

Bad luck

The third factor that is overlooked on the way up, as well as down, is pure luck. Sometimes a manager will hit on a strategy that works largely because it captures the current zeitgeist, rather than because it is inherently brilliant. The result may be years of outperformance as, for example, value of growth stocks go on a tear. However, when that manager’s luck changes, they may have nothing to counter with because, all along, the were relying on a specific tailwind to stay ahead. In Woodford’s case, a trusty investment strategy that saw him avoid most the carnage of the financial crisis, grew tired as growth stocks subsequently thumped defensive value plays of the sort he originally favoured.

For investors?

So, what are investor to make of this? The answer is that it reinforces the need to be vigilant. Yes, the best active fund managers can outperform the rest of the market for years. However, when they either drift out of favour, or wander too far off-piste, things can go wrong. So, watch out for evidence of this “style drift” and any signs that a manager is struggling to fulfil their original brief.

To find out more

You can email me at the address below. However, to read more about the role of luck in the rise and fall of life’s superstars, you may also like to try this book;