Dampier (pictured), head of research at Hargreaves Lansdown, says that any manager can have a period of outperformance, but believes that they need to go through at least one full market cycle – from boom to bust – to show their true worth. When asked whether managers who top the performance tables but only have a five-year track record can be held in similar esteem as those who have run funds over a longer period, Dampier was definitive in his answer.
"No they can’t, that’s the short answer," he said.
Dampier highlighted FE Alpha Manager Alex Wright, who runs the Fidelity UK Smaller Companies fund, as a manager who has a stellar track record but who needs more time to prove himself.
"This is especially the case in small caps, an area of the market where you can be a hero one minute and a villain the next," he said.
"Alex is a manager that clearly has a good record, but could well have caught a tailwind after the crash."
"You need to see how he gets on when stuff really hits the fan, so to speak."
Wright has run Fidelity UK Smaller Companies since its launch in February 2008.
The £248m fund, which has just been soft-closed due to high inflows, has been the standout performer in the IMA UK Smaller Companies sector over this time.
According to FE Analytics, it is the second-best performing portfolio over one and three years and the highest-ranking fund over five, with returns of 180.56 per cent.
Its benchmark – the Numis Smaller Companies ex IT – and its sector average have returned 67.87 and 50.67 per cent respectively over the longer period.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Although the fund has been slightly less volatile than its benchmark over the period, it has a higher annualised volatility than the sector.
Dampier points to FE Alpha Manager Harry Nimmo as an example of someone who has performed well through a full market cycle.
He commented: "Harry Nimmo has a proven track record and has seen all market movements."
"He is seldom the number-one in a bull market, but that is because he doesn’t own blue-sky companies that fly in a rally – those are the ones that absolutely take you out when markets fall."
"For us, a manager needs a seven-year track record. From our point of view, that is the shortest amount of time on which you can judge a manager’s performance."
FE Analytics data shows that the top-performing fund in the IMA UK Smaller Companies sector over seven years is the five crown-rated Marlborough UK Micro Cap Growth portfolio, which has delivered returns of 116.45 per cent.
The fund is run by FE Alpha Manager Giles Hargreave, whose career spans back to 1969.
Nimmo’s £1.1bn Standard Life UK Smaller Companies fund comes in third over that time, with returns of 101.06 per cent.
Unlike Hargreave and Nimmo, Wright has a valuation-led approach to investing, trading frequently to take advantage of falls in share prices.
Dampier says that this is one of the major reasons why his Fidelity UK Smaller Companies fund has topped the tables in the post-crash years.
"A lot of fund managers have their moment in the sun, so to speak, but most of the time it isn’t because they are a star; it is because their style is in vogue," he explained.
"That is something that investors need to differentiate between."
"Being in small caps, especially with a value approach, you would expect a manager to do well in a rising market, wouldn’t you?"
"However, you need to look at whether their stock selection has actually added any value."
"Sometimes a fund can be up 100 per cent, but when you look at the portfolio you can see they haven’t added any value."
"You can’t just look at numbers, they don’t mean everything," he added.
Matt Jennings, associate investment director at Fidelity, says question marks over Wright’s experience are unfair.
He points to the fact that Wright has been running the fund since before the fall of Lehman Brothers, which he says shows that his style works in a period of poor sentiment.
"I think it would be unfair to claim that Alex hasn’t been through a market cycle," he said.
"He launched the fund in February 2008 and has over five years of experience in what have been the most extreme market conditions in living memory."
"We see Lehman Brothers going bust in September 2008 as the beginning of a pretty serious bear market, especially in small caps."
Jennings says that Wright's focus on quality companies that have been de-rated means that his approach suits both rising and falling markets.
"Between February and December that year the Numis Smaller Companies index lost 38 per cent, while Alex’s fund lost 35 per cent – so while he still outperformed the index, there were some pretty serious falls," he said.
"Alex has managed to outperform because he insists on buying companies that offer him downside protection, businesses with high barriers to entry, tangible assets and strong market positions."
There are a number of other high-profile managers in the IMA universe who have topped the performance tables over the short- and medium-term, but who have been running their funds for less than seven years.
FE Alpha Manager Mark Martin’s Neptune UK Mid Cap portfolio is number-one in the IMA UK All Companies sector over three years, with returns of 79.96 per cent, while the FTSE 250 and sector average have returned 41.35 per cent and 27.24 per cent, respectively.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Martin’s career running funds in the IMA universe spans back to December 2008.
In the fixed income space, FE Alpha Manager Ariel Bezalel’s Jupiter Strategic Bond fund is highly respected, but he will not achieve a five-year track record until June this year.
The fund is a top-quartile performer in the IMA Sterling Strategic Bond sector over three years.
FE Alpha Manager Stuart Rhodes is another. His £5.6bn M&G Global Dividend fund is one of the bestselling portfolios in the entire IMA unit trust and OEIC universe over 12 months, even though the manager’s track record only goes back to July 2008.