The Illusion of Star Fund Managers

It is easy for individual investors to believe that strong past performance indicates a fund manager has exceptional skill. Neil Woodford, once seen as Britain’s answer to Warren Buffett, has now become a cautionary tale that exposes this dangerous assumption. His Woodford Equity Income Fund has been gated, meaning investors cannot withdraw their money until further notice. This follows a prolonged period of underperformance that led to mass investor withdrawals.

However, what is perhaps more shocking is not that ordinary investors fell into this trap, but that many well-resourced professional fund selectors made the same mistake. Major firms such as St James’s Place, Openwork, and Hargreaves Lansdown continued to back Woodford even as his performance faltered. The failure of these institutions raises serious questions about whether anyone—no matter how experienced—can consistently identify winning fund managers.

Why We Never Included Woodford’s Funds

When Woodford managed Invesco Perpetual’s High Income Fund, he was one of the very few fund managers who passed our purely quantitative tests for generating plausible ‘alpha’—the ability to consistently outperform a benchmark after adjusting for risk. However, our broader analysis led us to reject active management entirely.

Even though statistical tests suggested Woodford’s performance was unlikely to be pure luck, deeper analysis painted a different picture. His outperformance was the result of a single strategy working exceptionally well over a long period—not evidence of repeatable skill. Relying on one strategy for so long is not something active managers can bank on. It was a lucky break, albeit one that took skill to exploit.

In October 2013, when Woodford left Invesco to start his own firm, we wrote an article warning that his investors faced a difficult choice:

• Should they follow him to his new venture?
• Should they stick with the remaining Invesco team?
• Or should they walk away completely and wait to see if he could prove his worth again?

We noted that even before his departure, questions were already being asked about whether Woodford had lost his touch. His stellar reputation was built on returns generated 6 to 14 years earlier, or even further back in the late 1990s. Investors following him into his new funds were betting on past success rather than current performance.

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