Influential folk, asset managers. These are the people paid to decide whether our nest eggs are better invested in Tesco or Sainsbury’s, Barclays or Lloyds, or indeed in pork belly futures or Paraguayan government bonds.
They’re important not only because their talents determine the size of our pensions, but because as a class they ought to be making the world a more prosperous place. They tend to be brainy and curious and the good ones manage somehow to combine conviction with humility. They’re stubborn enough to stick to their guns in the face of bubbles and panics, humble enough to recognise they can often be wrong and to adapt their positions accordingly. They can be dysfunctional, arrogant (when their latest performance numbers are flattering), despondent (when they’re not) and on occasions infantile. One asset management boss once told me he was “the most overpaid nanny in the world”.
How these precocious toddlers are parented and managed is important, but the world is divided on how to go about it. Take two cases in the past week. Wellcome Trust, Britain’s biggest charitable endowment, reported sparkling investment results from its home-grown team of fund managers and left no one in doubt that it was ready to bring more money in-house after lousy performance by its outside asset managers. “Warning bells are sounding,” Danny Truell, its investment chief, said as he reported that eight out of eleven of the trust’s external fund managers had underperformed. He has already brought in-house the management of 45 per cent of the £21 billion that the trust owns, from 7 per cent when he arrived 11 years ago. In effect, a high-powered, high-conviction hedge fund has been created and embedded inside the charity, with bountiful results for medical research.
A day later Alliance Trust, one of Britain’s biggest investment trusts, came to the opposite conclusion. It announced plans to sell its in-house investment division and farm out its entire £3 billion portfolio to nine outside firms to manage. Prodded into action by the activist investor Elliott Advisors, Alliance, which has 60,000 small direct shareholders (me included) and many more indirectly, is abandoning the approach of the past 130 years and putting its faith entirely in distant third parties.
Can Wellcome and Alliance both be right? They are different beasts, but their goals are not dissimilar. Wellcome has to produce consistent income each year to meet growing bills for medical research while preserving its ability to do so in perpetuity. Alliance wants a rising income to maintain its 49-year track record of dividend growth, again in perpetuity.
Advertisement
Mr Truell believes that the long-termist culture and governance of an organisation such as Wellcome can winkle out better performance from its employed fund managers than from outsiders. They have only one client, the trust, and one goal. There are no distractions, no conflicts of interest and no worry about the occasional quarter of underperformance.
They are cheaper, too, per pound managed, even though they are paid City-style rewards. Mr Truell bagged more than £3 million last year, making him Britain’s highest-paid charity worker by some margin. Given the £1 billion a year he helps to deliver for research into cancer and Alzheimer’s, it looks like money well spent.
Lord Smith of Kelvin, chairman of Alliance, has a different take. He says that the small in-house team (Alliance has a mere 17 stockpickers) couldn’t hope to cover the entire waterfront of investment options. Farming out the job of sifting opportunities to many more people made better sense.
The past performance of Alliance with its in-house managers must have been a factor, too. If Alliance had achieved the kind of returns produced by Wellcome, which has notched up a real return of 4,825 per cent since 1985, today it would be one of Britain’s biggest companies. Instead, the outcome has been middle of the road.
I’m not convinced by Lord Smith’s argument that you need a lot of people to increase the chances of good returns. Wellcome has only 25 in-house stockpickers. Berkshire Hathaway has produced lastingly brilliant returns from a tiny team led by Warren Buffett and Charlie Munger. A few highly talented managers are perfectly capable of making the big key calls that determine success. A cast of thousands is surely more likely to lead to mediocrity in outcomes.
Advertisement
Perhaps a better argument for outsourcing to a string of managers is that there is less danger of group-think and much less risk of becoming emotionally wedded to a particular unsuccessful strategy. Farming out decisions is a natural diversifier.
It can also make it much easier to change personnel. Witan, a £1.6 billion investment trust, has become much more successful since moving to a multi-manager approach. Its pot is divvied up between eight to ten external managers and on average one is fired or replaced each year. For a self-managed institution, sacking the single in-house fund management team is a far more seismic, not to say embarrassing option, and so very rarely happens.
The Wellcome approach still sounds better, though. It simply requires a disciplined culture and strong governance. A good nanny is priceless.
Patrick Hosking is Financial Editor of The Times