Shooting stars who lead the way to profit

At one time, few people outside the City would have been able to name a single fund manager. These days, while those who move money around the markets may not be household names, there would be few homes in Middle England where the names Nicola Horlick, Carol Galley, Warren Buffett or William Littlewood did not ring at least the faintest of bells.

At one time, few people outside the City would have been able to name a single fund manager. These days, while those who move money around the markets may not be household names, there would be few homes in Middle England where the names Nicola Horlick, Carol Galley, Warren Buffett or William Littlewood did not ring at least the faintest of bells.

This is partly due to the increasing popularity of stock market investment. Once the preserve of the very rich and City professionals, the privatisations of the 1980s made share ownership commonplace. The outstanding performance of the stock markets over the past decade, coupled with huge share price rises by some technology stocks, have made share ownership not only common, but popular enough to be deemed interesting. Increased interest brings greater media attention, with fund management spawning its own celebrities.

Running a fund exceptionally well and making money for your clients, is the prerequisite to becoming a star fund manager, but other factors help. Being a woman and having a family made Ms Horlick an object of curiosity, promoting her from the City pages to the front page.

Cautious investors should be sceptical about the cult of star fund managers. But there is more than media hype to their reputations. Jason Hollands, deputy managing director of Best Investment, says: "There are some fund managers whose judgement is exceptional."

One need only look at the performance of their funds to see the proof. Nigel Thomas's UK Growth Fund at ABN Amro, for example, is a five-star rated fund which has been in the top quartile over one, two, three, five and 10 years. Mr Thomas has been running the fund for more than a decade, with great success: £100 invested with Mr Thomas 10 years ago would today be worth £8,940.

Rory Powe, who has been running Invesco GT European Growth since 1991, is another manager at the helm of a five-star fund. Over 10 years, his fund has returned 721 per cent. Roger Guy at Gartmore, who manages the European Select Opportunities fund, is another of the industry's long-running favourites. Tipped to be the next big things are John Dodd and Mark Tyndall who run the UK Growth fund at Artemis.

While you may feel safer (or just more glamorous) having your money invested with one of the high-flyers, there are drawbacks. The first of these is how to react when the manager jumps ship. Should you follow your star or stick with the fund?

The question is particularly relevant to investors who have bought Henderson's technology funds. Brian Ashford-Russell and Tim Woolley, two big names in Henderson's technology team, have resigned to set up an investment firm. They leave Henderson next month, along with another team member.

Best Investment's Mr Hollands argues that their departure is a concern. "Henderson's technology team was head and shoulders above the competition," he says. "They had the largest technology team in Europe. Now they are going to lose their three most senior members."

But he is not advising his clients to sell straightaway. Those who hold Henderson's investment trust need not be concerned, since the board has made it clear it will pick Ashford-Russell and Woolley's new company to take over management of the trust. But unit trust clients will need to examine their position carefully. "In many cases, it will not be in the best interests of investors to sell all their holdings, because they will just incur a heavy capital gains tax liability," says Mr Hollands. "However, they may find that it is appropriate to switch into another Henderson fund." He adds that anyone looking to make new investments in the technology sector would be better off looking at Soc Gen or Aberdeen's funds.

Whether you own a fund managed by a star or a mere mortal, you must monitor your own portfolio. Investment companies are not obliged to tell you if a senior fund manager leaves, except in the annual report. If your fund manager is a big name, you may find that his or her movements make the City pages of the newspapers.

If your manager is moving you need to review the case for holding the fund. Did you buy the fund simply on the basis of the individual fund manager's record, or were there more fundamental reasons for buying it? Has the manager lived up to your expectations? Will the team of analysts stay or are they off too? In the case of the Henderson technology trusts, the fact that three key members are leaving means that the firm is losing a significant part of its competitive advantage.

If a star's team stays when he or she leaves, it could be worth waiting to see how they do without a celebrity at the helm. If you decide that you would be better-off following the star manager, examine your tax position carefully.

Following personalities around the markets is a risky business, not only because they may leave an investment house suddenly. Like all celebrities, star fund managers tend to draw crowds, which may not be the best thing for your investment. The larger a fund becomes, the less nimble it is when it comes to moving in and out of stocks. Advisers warn that, as soon as a fund becomes larger than £1bn, it loses some of its flexibility.

We have been asked to clarify that the case involves the interpretation of management agreements and does not involve any allegation of dishonesty.