Never, ever invest in a fund management company

Less than a year after listing it looks like it might be game over for Gartmore. In March it lost one of its top fund managers, Guillaume Rambourg, in unpleasant circumstances. Then it lost another – Gervais Williams. And this week it appears to be losing the rest.

The chief investment officer Dominic Rossi is off to Fidelity. And Roger Guy, who manages 16% of the firm’s assets, has announced that he would like to spend more time with his family. So, despite having said back on 1 April (there’s a clue) that he was “totally commited”, Guy’s off too, in early 2011.

Gartmore’s shares promptly fell 15%. The only comfort for shareholders (who had seen the shares halve even before Guy’s announcement)? The collapse means that Guy’s own holding in Gartmore is now worth £3.2m less than it was.

But all this throws into sharp relief a point that one of my fund manager friends (himself ex-Gartmore) is constantly making: you should never invest in a fund management company. It looks tempting, what with the ludicrously high margins and the never-revoked licence to rip savers off at every turn with unjustified fees.

But it never works. Why? “Key man risk”, something that, to give the firm its due, was much mentioned in the original prospectus. Gartmore has a variety of problems (it was once owned by private equity and so is highly indebted, a bit like EMI…). But the fact that it was deeply dependent on a few managers – Guy in particular – was always going to be its Achilles heel. Downfall might have come when he left, or it might have come when his performance failed (note that his funds have all lost money this year, despite the rising market).

Shares track companies, not people. But in fund management it is the people you want to be investors in – as long as they keep performing. It is, in that sense, a little like investing in a football club. And you wouldn’t want to ever do that.

The truth is that asset management companies – just like football companies – are simply not suited to the stock market. That doesn’t mean more won’t list. But it does mean we shouldn’t invest in them.

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