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RP: There’s a phenomenon psychologists describe as the halo affect.
It refers to our tendency to use one piece of evidence about someone to form an overall impression of them.
It’s very common in the fund industry. When a manager performs well, even over a short period of time, we assume they will carry on outperforming in the future.
AO: The legendary Bond King Bill Gross is an example of that where he was very well regarded for being a successful bond fund manager because a certain set of economic scenarios presented themselves and they happened to have favoured his particular investment style, and then of course that dispensation came to an end, a different environment presented itself and he wasn’t able to replicate or maintain that level of outperformance, and then he moved to another firm, that didn’t help.
RP: Another example of the halo effect is the way that a fund manager called Neil Woodford was hailed as “Britain’s Warren Buffett”. It seemed he could no wrong.
AO: Neil Woodford essentially made his career by avoiding the so-called tech bubble in the late 1990s. If you took out that single decision, ie. avoiding large growth stocks or tech stocks during that particular market condition, his subsequent results were actually incredibly mediocre.
But it didn’t stop the media, investors, private investors, institutional investors and indeed advisers from continuing to give him the regard that he had earned as a result of that.
RP: Unfortunately, it didn’t end well. Woodford set up his own fund management business and flopped spectacularly. His investors lost large sums of money.
But what happened then? Attention turned towards the next “star” manager to anoint.
AO: The investment management business is really at the heart of it, a marketing business. The investment management industry has a huge, huge budget. And, they are prepared to spend that money to persuade ordinary investors, financial advisers, and indeed the media, to not the look at the evidence but to focus on the hype.
What we know works in the long term as far as investing is concerned, it is really simple: invest in the long run, stay invested, diversify broadly, it’s been described as ‘watching paint dry’, right?
As a journalist, you can’t really write about that all the time.
RP: There are many lessons to learn from the Woodford experience.
One of them is to remember that fund managers are only human. They don’t wear halos. So don’t be swayed by the media hype.
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