IPE Views: What do you do when a guru leaves?
Mitesh Sheth discusses the cult of personality in asset management, and what investors should do when key personnel leave for pastures new
The word guru comes from the Sanskrit meaning spiritual master, or seer, 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 as someone special, or one who has special powers and insights. Even today our use of the word guru in fund management refers to someone who is a subject matter expert, a master, a genius, someone who possesses insight that baffles others.
Why are they different?
It is not clear what makes a guru; this is a much-disputed subject. 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 practice to achieve mastery in a field. I think you need both.
If you’re naturally good at something, you’re more likely to enjoy it and be inclined to spend hours practicing your craft. Either way, in every field whether it be music, sports, science, and so on. we can see people who are outliers, possessing extra-ordinary skill and insight. Fund managers are no different.
Why do they leave?
Morningstar research suggests that fund managers have an average tenure of 4.5 years. That seems frightfully short. I feel fund management stars stay longer than this on average, as they recognise the value the firm, culture and tools bring. But gurus can and do leave.
They can get frustrated by a feeling of carrying others, they may want a greater share of the economics than a firm is willing to give them, they may want their name on the door, they may want a smaller fund to replicate the success of their earlier years, they may want less distraction, less politics and every once in a while they are actually pushed out (they can become a real burden, hold the business hostage and ultimately need to go).
So what should you do?
It’s not obvious whether pension funds should stay with the firm or follow the gurus. You have to ask the question, why did you invest in the first place? What was the strategic rationale for the investment? Is it the underlying security, in which case you may still have the assets, or is it more the manager’s individual selection skill? Also critical to understand is how liquid and secure are the assets?
An early warning system
One successful approach is to identify and communicate from the outset where there is a key person dependency. So it is at the point at which you are about to hire a new manager that you can most dispassionately determine what would cause you to fire that manager.
One of our crucial flags is key-person risk. This enables our consultants to warn the client in advance that if this person or team leaves we anticipate making an immediate recommendation to liquidate and ensuring 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 dependency clearly from the outset, clients are able to move quickly upon the news of a critical departure.
Maybe we shouldn’t invest with gurus in the first place?
In some cases that is true, but it would be too convenient to say you should never have invested with a star in the first place. Most fundamental strategies will have exposure to key people risk.
The best that we can advise is to know that and prepare for the worst before we ever invest.
Mitesh Sheth is director of strategy at the London-based consultancy Redington