Fund managers

We’ve written quite a few notes on the fund managers, of late. Here is one back in September, on Magellan more specifically.

It’s a good, short, easy to read note that lays out why we don’t like it, but the key bit is the below. Fund managers have their own version of the famous Soros “reflexivity”, in which the underperformance begets the outflows which begets the underperformance.

“So there’s little reason to expect respite from a high fee charging manager, which, if coupled with underperformance, tends to mean ongoing net outflows, and net outflows are a key driver of the share price.”

Cathy Wood’s ARK fund is perhaps an easier version of this idea to get one’s head around, certainly when the fund was on the way up.

Good initial performance triggers inflows, the inflows are used to bid up the existing successful positions, causing them to perform well again, trigging further inflows.

Some of the more prominent ESG-oriented fund managers appear to be enjoying this positive feedback loop, and we are very cautious on them, and their underlying investments, too.

In general, because fund managers have immense operating leverage (profit is essentially just FUM * fees) the scale returns are tremendous. But they cut both ways.

The net outflows being the key driver of the share price puts today’s mandate termination into stark focus.

It is very possible to imagine we see a “proper” capitulation on MFG from here. The AFR already ran the puff piece, it’s harder to run the same piece again so soon.

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