I, for my sins, follow Arsenal Football Club as some of my colleagues, for their sins, follow Chelsea Football Club. The water cooler chats following some awful results for both sides have inevitably centred on the effectiveness of each team’s manager; the vastly experienced Arsene Wenger and the other extreme, a manger who is younger than some of his players, Andre Villas-Boas.
The debate about whether to sack a manager will typically originate from a series of disappointing results and the doom of finishing a football season without a trophy, or perhaps being relegated a division. Mr Wenger and Mr Villas-Boas are classic examples of whether a club should sack the manger. Both are under huge pressure to win trophies and are unlikely to. Arsene Wenger, whilst previously successful has not won a trophy for the Arsenal for nearly seven years and, according to the pundits, will struggle again next year. Villas-Boas is at the other end of the scale, highly talented with short term success as a result of winning a domestic double and the UEFA Europa Laegue with his previous club Porto, yet now faced with an impatient boss who has a tendency to fire managers at a whim.
On first impressions the connection might appear crude, but I think the process or firing either of these football managers is comparable to under-performing fund managers in the asset management industry.
The first assumption to make is that the equivalent of the chairman in this comparison is not the fund manager’s employer, but the investor, who in effect makes the decision to cease his or her relationship with a fund manager by switching funds. The other key difference between investment fund managers and football managers is that investors tend to put up with poor performance for longer than football club chairmen. Professional football managers last just over 18 months on average whereas current wisdom for holding an investment fund is that you should invest with a minimum horizon of five years.
So, how does an investor judge whether to give a manager more time? And why are they to put up with poor manager performance than football club chairmen? Arsene Wenger has a clear management style and is sticking to his guns, like it or not. When Arsenal thrashed Tottenham many sins were forgiven, there is more confidence from the fans and a stay of execution. Chelsea also won at the weekend, but Andre Villas-Boas has no recognised playing style or authority and so is still under scrutiny.
Unlike a football fan, an investor trying quantifying poor performance is difficult. For example, if the stock market falls by 20% but your investment fund falls by ‘only’ 10% your fund manager might claim that as excellent performance, but you’ve still lost 10p in the pound. How can you tell if your fund manager has lost it, or is actually ahead of the game? The simple answer for investors is that for all intents and purposes, you can’t. You have to rely on advisers and their processes of examining a fund manager’s style, deals and his or her ability over similar investment periods to try and make money for investors.
In reality even for professional financial advisers this is hard work. Past performance and fund factsheets are not enough as they wouldn’t reveal whether a manager was going through a divorce or had changed his contract of employment and a bonus that depends on asset gathering rather than fund performance, for instance? Suddenly the task of the football chairman is easier.
In the new, brighter, world of greater accountability and ongoing dodgy economics, wealth managers and financial advisers have to prove value for the fees they charge. Only those that can provide genuine guidance to their clients over whether to replace a fund manager should keep their clients. A run of poor results will catch the eye, but investment decisions should only be made with the use of cold logic; exactly how a football chairman should make his decision to ‘replace’ the manager of his team.