The Folly of Star Fund Managers: What Investors Need to Learn
It’s a pattern we see time and again.
A fund manager delivers spectacular early returns, the press dubs them “the next Warren Buffett,” and the money pours in – often just before their performance falters, leaving investors disappointed and poorer.
Few stories illustrate this cycle more clearly than the rise and fall of Neil Woodford, Cathie Wood, and even Terry Smith. Their stories offer a stark reminder of why chasing star fund managers based on past performance can be a costly mistake.
The numbers confirm that.
Neil Woodford: From National Hero to Investor Disaster
Neil Woodford once enjoyed near-mythical status in the UK investment world.
His record at Invesco, where he skillfully navigated the dot-com bubble and the 2008 financial crisis, earned him the trust of tens of thousands of investors.
When he launched his Woodford Equity Income Fund in 2014, investors followed him eagerly, seeking to replicate his past successes.
For a brief moment, they did: in 2015, the fund returned around 16%.
But the cracks began to appear as Woodford took increasingly concentrated bets in small, illiquid stocks, diverging from the blue-chip approach that made him famous. By 2019, the fund was suspended, leaving investors unable to access their money.
Over the preceding four years, the fund had returned less than 1%, while the wider market delivered close to 29%.
Many investors lost up to 41% of their savings while the FTSE All-Share index rose 14% during the same period.
What started as a promise of safety and steady returns ended in a painful lesson about liquidity risk and the danger of manager hubris.
Cathie Wood: Innovation’s Volatile Ride
On the other side of the Atlantic, Cathie Wood became the poster child of innovation investing with her ARK Innovation ETF. She captured headlines with jaw-dropping returns: ARKK was up 85% in 2017 and a staggering 149% in 2020 as it rode the wave of high-growth, disruptive tech stocks.
Investors poured billions into ARK’s funds, eager to capture these eye-watering gains.
But as quickly as the ascent came, so too did the fall. In 2021, ARKK dropped 24%, followed by a brutal 67% decline in 2022, making it one of the worst-performing funds.
Across a five-year window, ARK delivered a negative return of –10.4% despite the strong early years.
Billions in investor wealth were wiped out, not because Cathie Wood lacked conviction, but because her concentrated bets on unprofitable tech companies proved painfully exposed when market conditions shifted.
Investors who chased those high past returns often did so at exactly the wrong time.
Terry Smith: The Case of Quiet Underperformance
Terry Smith’s Fundsmith Equity has long been lauded for its quality-growth approach, investing in durable businesses with high returns on capital.
Since its inception in 2010, Fundsmith has delivered approximately 607%, comfortably beating the MSCI World’s 403%, an impressive track record for long-term investors.
However, analysing more recent returns has revealed the challenges that even experienced managers face when adapting to market shifts. Fundsmith has now underperformed its benchmark across the last 1, 3, and 5-year periods.
In 2024, Fundsmith returned 8.9%, while the MSCI World delivered 20.8%, marking the fifth consecutive year of underperformance.
The fund saw £3.3 billion in outflows in 2024 alone, reflecting investor frustration as Terry Smith’s style struggled against a market heavily driven by the surge in AI and mega-cap tech stocks, which Fundsmith largely avoided.
While Terry Smith continues to champion patience and discipline, the reality for many investors is that long-term discipline can be challenging when faced with years of underperformance.
By contrast, Capital’s Intelligent Investing range of portfolios (built around the Evidence Based Investing philosophy) that I recommend for my own clients, calmly and consistently outperforms the majority of the so-called ‘star managers’ – year after year.
My advice? Avoid the stars, as they often come crashing down to earth!
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