It pays to back the star fund managers

When it comes to buying an actively managed funds, Sarah Moore explains why it pays to look for star quality.

When Neil Woodford, probably the UK's best-known fund manager, left Invesco Perpetual to set up on his own, investors withdrew £5bn over a 12-month period from the funds he had previously managed. It's a hazard common to any business with a "star manager". As a result, fund-management groups are increasingly using teams of managers to protect against investors deserting them to follow "stars" more than 75% of US mutual funds (6,219 out of 8,072) now have at least two managers, says data provider Lipper.

The bad news for fund-management groups is that investors who back a star manager may have the right idea. In a paper published in the Financial Analysts Journal, Eitan Goldman, Zhenzhen Sun and Xiyu Zhou analysed 3,895 equity funds between 1990 and 2012. They found that funds run by a single manager had far more concentrated portfolios and tended to perform better, despite having higher costs, than funds managed by multiple managers.

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Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.