The City’s star stock pickers are fizzling out – they won’t be missed
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Somerset Capital, which included former business secretary Jacob Rees-Mogg among its founders, is closing down. Odey Asset Management, founded by the flamboyant Crispin Odey, was forced out of business earlier this year.
Neil Woodford, the legendary stock picker, is long gone, while even Sir Christopher Hohn is making less money than he used to, which at least means he will have less to dish out to Extinction Rebellion.
One by one, the maverick money managers of the City are disappearing. The explanation varies from case to case. And yet, the larger point is surely this: they won’t be missed.
The fees were too high, the performance often dismal and most of all, an algorithm can do the job far better. Sure, there will be fewer headlines. But it will be a safer market for investors, and the returns will be better as well.
It has been a dismal week for the stock picking trade. Somerset Capital, which at its peak had £10bn under management, and which rejected a bid for the firm from Artemis Investment Management four years ago, has decided to close itself down after 16 years of trading.
Its funds will be transferred to a new adviser as soon as possible, following the decision by St James’s Place wealth management to sever its ties with the business.
What went wrong? It turned out that its focus on emerging markets, at a time when they were underperforming the rest of the world, meant that returns were not good enough for it to continue.
In October, Odey Asset Management announced that it was closing. A series of shocking allegations of sexual harassment by its founder Crispin Odey meant people were reluctant to do business with it any more. Lawyers for Mr Odey have “strenuously” denied the allegations of sexual assault against him. The Financial Conduct Authority is investigating his conduct.
Sir Christopher Hohn’s TCI Fund Management is no longer the unstoppable force it once was, revealing this week a 48pc fall in pre-tax profits. Neil Woodford of Woodford Asset Management, was forced to close his fund back in 2019 after heavy losses on unquoted assets.
The list goes on. Terry Smith, the founder of the Fundsmith, is still going strong, but even his operation suffered a sharp fall in profits last year as performance flagged. Otherwise, all the high-profile, maverick money managers are disappearing.
In some ways that is a shame. The big names brought some much-needed colour to the market, lighting up what can often be a dull business with some pizzazz and excitement.
Occasionally they made the kind of gutsy contrarian bet that paid off spectacularly, although it happened far less often than they typically claimed.
A few of them were always good for a lively quote for a journalist who needed to spark their copy to life, a quality that should never be lightly dismissed. And yet, despite that, there were three big problems they all shared.
First, it was increasingly hard to justify the fees they charged. It varied from fund to fund, and manager to manager, but as a general rule the high-profile stock pickers were also relatively expensive.
No one minds paying for performance, but it has to be exceptional, and it has to be consistent. Mediocrity is not worth paying for, and that one or two extra percent spread over many years meant returns were often significantly lower than they should have been.
With the rise of passive funds charging minimal amounts investors had a better alternative, and were quite rightly taking it.
Next, artificial intelligence systems are evolving so rapidly they can do the same work for less. A study by Finder.com earlier this year concluded that a basket of stocks picked by ChatGPT easily outperformed the S&P 500 index.
An academic study published by Finance Research found AI powered funds outperformed their human run rivals by an average of 5.8pc a year. It remains to be seen whether those kinds of figures can be replicated over a longer period of time, or whether all the programmes end up copying each other, and cancelling out any returns they make.
And yet, it is surely clear that fund management with its focus on number crunching and processing lots of data is one of the industries where machines are likely to perform significantly better than humans. As the technology improves, super smart robots are likely to take over.
Finally, the universe of UK stocks has shrunk so much they can no longer make much of a difference. For a brilliant stock picker to prosper, there have to be some stocks to actually pick.
In the UK, that is less and less true with every year that passes. In 2007, there were 3,300 companies listed on the London market, but by last year that total had fallen to fewer than 2,000.
On current trends, by the end of the decade we may be down to just a few hundred.
It is hard to find any neglected gems when there are so few businesses left to choose from. When they tried to invest in other countries they generally didn’t have the local expertise to make a success of it.
It has become very hard for anyone to genuinely succeed in fund management. If there is a role for star stock pickers, it may be in the private equity trusts that invest in private businesses rather than in the listed markets – but that is still a very underdeveloped part of the industry.
The big-name, maverick money managers were entertaining. They could tell a good story, and command some headlines, and very occasionally the force of their personality could persuade new investors into the market and even make them some money.
Yet in reality they are well past their sell-by date. The City is better off without them.
The algorithms may be duller. But over time they will generate better returns – and that is what investors need.
