The majority of fund managers are simply ‘pretenders’ or ‘amateur investors’ in much of their day-to-day work and aren’t performing as they should to justify their fees, according to Blue Whale Capital’s Stephen Yiu.
Yiu, lead manager of LF Blue Whale Growth fund, said many fund managers aren’t taking the right steps or utilising the correct tools if their objective is to achieve significant performance against the market.
“By looking at the returns of the 300 funds in the IA Global sector, actually the average fund underperforms, and you will be asking ‘What is the point of picking a manager if is likely that he underperforms?’ You may as well buy a tracker. It is sad, but it is what is happening,” he said.
“Every active manager should be aiming to deliver at least 5 per cent outperformance per annum over a cycle to justify their fees.”
Yiu, who has more than 16 years of industry experience, launched his now £80m strategy in September 2017 having worked for the likes of New Star (now Janus Henderson Investors) and Artemis, where he co-managed a £800m strategy.
While the average fund in the IA Global sector is down by 1.05 per cent year-to-date, LF Blue Whale Growth is the top-performing fund of its sector, up by 14.76 per cent so far in 2018.
Performance of fund vs sector & benchmark YTD
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Source: FE Analytics
According to Yiu, outperformance can be achieved and is not impossible for a global fund to outperform its benchmark by at least 5 per cent, but the right tools should be put in place.
“It is not impossible, but it is a lot of hard work, there is nothing magical about it. I wouldn’t claim we have any special formula, but we do what it’s supposed to be done. However, people don’t do it.”
Yiu (pictured) continued: “Many fund managers are utilising sell-side research or doing things like meeting with company management and site visits, etc.
“These are totally pointless if their objective is to achieve significant outperformance against the market.”
He said one of the biggest mistakes made by many fund houses that explains the poor numbers is that they don’t allocate the necessary resources to run funds. 
The use of sell-side brokers by asset management firms to research companies instead of having their own group of analysts doing research for each fund is one of the main errors.
“At Blue Whale we have five people doing all the research,” he explained. “We have a culture of working very hard as a team and we do our own research which no one else has access to.
“But a big asset manager will allocate its resources focusing on the assets under management and, to have five people – as we have – you need to be running at least £1bn of assets.”
A lack of risk taken when investing and the aim of performing in line with the benchmark and the sector is another mistake many in the industry make, he pointed out.
“Many fund managers try to stay close to the benchmark and to the sector allocation. They look at the top ten of the index and try to not to stay away too much,” said the LF Blue Whale Growth manager.
“They have all these parameters in place and the outcome is that you will never underperform the market that much, maybe by 2 to 3 per cent. However, the maximum they will outperform the market is also 2 to 3 per cent. “
“But, over time, with the fees that you charge as a fund, you will end up underperforming the market or the index, that is our industry.
“Despite this, investors aren’t going to take their money out because firstly they can’t see the numbers that clearly, they say: ’oh this fund is top quartile, is above average, is fine’,” Yiu added.
The fear of backing new strategies or new fund managers and a tendency to support those managers that used to outperform but no longer do is also a common behaviour he sees in investors buying into global equity funds.
These, he said, still want to take risks, but fear backing new strategies or younger fund managers with not-that-long a track record.
“I don’t think investors want less risk,” said Yiu. “If that was the case they would be buying trackers as it is the lowest risk you can get in the equity market.
“What I think is that investors want to back funds that have been around for years even if the fund is underperforming; this is because at least they can say the fund manager had done well before, they have a reason to back an underperforming strategy.”
He added: “If you bought a fund from the bigger names in the industry you can say: ‘Oh, they have good resources, this fund manager did well 15 years ago’.
“You still have something to hang on to or to say to your underlying clients. But if you buy a new fund with a shorter track record and the fund underperforms you have nothing to fall back on.”
Performance of fund vs sector & index since launch
Source: FE Analytics
Since launch, LF Blue Whale Growth has delivered an 18.02 per cent total return compared with a 3.29 per cent gain for the average fund in the IA Global sector and a gain of 4.0 per cent gain for the MSCI World index. The fund has an ongoing charges figure (OCF) of 0.92 per cent.