What to do when an investment ‘guru’ departs?

The word ‘guru’ comes from the Sanskrit meaning spiritual master, one who dispels darkness. It is also used to convey a sense of gravitas or weighty with knowledge. A guru is often put on a pedestal, pos-sessing special powers and insights. Even today our use of the word guru in fund management refers to someone who is an expert, a geni-us, someone who possesses insight that baffles others.

Mitesh Sheth, Redington

Why are they different?

It is not clear what makes a guru. Some academics consider genius to come from innate talents, that some people’s brains are just wired differently. At the other end of the spectrum are those who say it takes roughly 10,000 hours of practise to achieve mastery in a field. I think you need both.

If you are naturally good at some-thing, you are more likely to enjoy it and spend hours practising your craft. Either way, in every field we see people who are outliers, pos-sessing extraordinary skill and in-sight. Fund managers are no differ-ent.

Why do they leave?

Morningstar found fund managers have an average tenure of 4.5 years. That seems frightfully short. I feel fund stars on average stay longer, as they recognise the value the firm, culture and tools bring. But they can and do leave. There are many potential reasons: Frus-tration by a feeling of carrying oth-ers, a greater share of the econom-ics than a firm is willing to give, a name on the door, a smaller fund to replicate success of earlier years, less distraction or less politics. Every once in a while they are pushed out – they can become a real burden, hold the business hos-tage and ultimately need to go.

So what should you do?

It is not obvious whether pension funds should stay with the firm or follow the gurus. You have to ask the question, why did you first in-vest? What was the strategic ra-tionale? Is it the underlying securi-ty, in which case you may still have the assets, or is it more the man-ager’s individual selection skill? It is also critical to understand how liquid and secure the assets are.

Is there an early warning system?

One successful approach is to iden-tify and communicate from the outset where there is a key person dependency. In our ‘Red Radar’ system one of the crucial flags is ‘Key Man Risk’. This enables our consultants to warn the client in advance that if this person/team leaves we antici-pate making an immediate recom-mendation to liquidate and ensur-ing they invest knowing they have the governance in place to do this.

We have found that on a number of occasions in the past 12-18 months that having identified this depend-ency clearly from the outset, clients are able to move quickly.

Is it best to simply avoid a guru?

In some cases that is true, but it would be too convenient to say you should never have invested with a star. Most fundamental strategies will have exposure to key people risk. The best we can advise is to know that and prepare for the worst before investing.