In the investment world, “star” fund managers can grab headlines with the remarkable returns generated from their bold, innovative investment strategies.

Investment titans such as Warren Buffett have become well-known over the years for generating significant returns for their clients.

However, for every Warren Buffett, there are plenty of less appealing stories where investors have lost out at the hands of an individual manager.

There’s perhaps no case more infamous of this than the rise and fall of Neil Woodford.

A rising star at Invesco Perpetual, Woodford managed to consistently beat market averages for more than 20 years with alternative investment picks that impressed many investors.

Subsequently, he created his own investment company in 2014, Woodford Investment Management, where the flagship Woodford Equity Income Fund continued to provide a return.

However, by 2019, his investors began pulling out of the fund as it stopped generating the returns they’d come to expect. In turn, Woodford was forced to rapidly liquidate investments and, ultimately, close the fund and his business entirely.

This has been particularly unfortunate for those investors who didn’t get out in time. In August 2021, FTAdviser reported that there was still nearly £124 million of cash stuck in the Woodford Equity Income Fund, a full two years since its collapse.

Stories like these are a stark reminder that investing your money with these star fund managers is often not the best strategy.

Here are just five reasons why.

1. Everyone can make mistakes

The first reason why choosing star fund managers is a fool’s errand is simply that people make mistakes.

Even the so-called “father” of index investing and the founder of Vanguard, Jack Bogle, was initially sacked from Wellington Management after making a poor merger decision.

The trouble is that, while Bogle forged a new path with Vanguard, those who lost money on his poor decisions got no such reprieve.

Just like everyone else, fund managers are humans who can make errors that cost you money.

A fund manager who claims to be able to provide unparalleled, guaranteed returns is either mistaken or deliberately misleading you.

2. Hype doesn’t always mean results

You may be tempted to invest in a star manager because other people are, or because they’ve been prominent in the trade press.

However, hype doesn’t always equate to something being a good investment.

Think of the GameStop short from earlier this year. Thousands of retail investors piled into the so-called “meme stock” because it had become popular on WallStreetBets, a forum on the social media site Reddit.

Unfortunately, those that got into the hype too late will no doubt have lost their money, as GameStop’s price plummeted from a peak of $347.51 to just $53.50 in a matter of a week.

Just because an investment is a popular choice for others doesn’t necessarily mean it’s the right choice for you. The same is true for star fund managers.

3. “Best-buy” lists are marketing tools, not advice

The reason that funds like the Woodford Equity Income Fund became so popular is because they often appear in “best-buy” lists, collations of popular investments.

The key point to remember is that these lists are marketing tools, not personalised financial advice. When funds appear on lists like these, there’s often a financial incentive for the author to convince you to buy.

However, there’s no assessment of how appropriate these investments are for you, nor what sort of return you can expect.

In fact, the author’s money may sometimes come from account fees or dealing commission. As a result, it doesn’t matter to them if you make a loss or not.

“Best-buy” lists can only base their opinions on how funds have performed so far. This may sometimes make them a good way to find a savings account, as they can show you the accounts with the highest interest rate in the market.

But, with investments, past performance is not indicative future performance. This means that there’s no guarantee these “best-buys” will offer anything to your portfolio.

4. It’s time in the market, not timing the market

The reason the idea of a star fund manager is so appealing is because it implies that there’s a way to beat market returns in the shortest time frame possible.

Unfortunately, this is often untrue. In general, longer time periods tend to provide the best chance of producing returns.

You may have heard the old adage “time in the market, not timing the market”. In essence, this idea encourages you to stay invested for a longer period to achieve returns, rather than trying to buy and sell for profit in a short time frame.

Historically, according to investment platform Nutmeg, this has proven to be a worthwhile investment strategy.

Nutmeg analysed the performance of global stocks across a period of nearly 50 years. Their research found that a randomly chosen stock had an almost 0% chance of making a loss when held for 14 years or more.

Similarly, the probability of positive returns rose to more than 95% in just 13 years.

Rather than relying on the promises of star managers, it can be sensible and more financially prudent to take a long-term outlook and target slow, steady returns over many years.

5. You may be taking on more risk than is appropriate for you

Crucially, investing with star fund managers can mean you end up taking on more risk than is right for you.

Woodford’s fund once again makes for a great comparison. According to an investigation by the Telegraph in 2019, the Woodford Equity Income Fund contained more than 50% of its holdings in FTSE 100 companies at its inception in 2014.

However, shortly before its collapse in 2019, this figure was around just 20%. Instead, it contained more than 20% of its holdings in smaller, more volatile investments, such as in the Alternative Index Market (AIM).

As a result, many investors with money in the fund were taking on far more risk than was appropriate for them, investing in smaller companies with a greater chance of returning a loss.

Star managers’ funds are not personalised to you and your needs. As a result, investing in this way potentially puts you in the position of taking on too much risk for your personal circumstances.

Working with a planner

In reality, there’s simply no substitute for pursuing a well-balanced, diversified portfolio with the help of a financial planner.

The irony of this is that a star manager’s fund could be a part of this portfolio. However, the key thing to remember is not to rely on a single investment like this for a return.

At Lightside, we can help you design an investment strategy with the right amount of risk and reward that works for you.

Most importantly, the plan we can design for you will target returns that suit you and your financial goals, ensuring that you’re able to live the kind of lifestyle you want.

To find out more about how we could help you, please email info@lightsidefp.co.uk or call 0151 372 0161.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.