Fund 'stars' are not so bright

SCARCELY a week goes by now without a star or star-plus team defecting from one investment bank to another or decamping from a fund management group to set up a hedge fund. But just as buying stars failed to stop Leeds United being relegated and very nearly saw Manchester City down there with them, it similarly fails to bring success in business.

The City refuses to believe this because the alternative to buying in the transfer market is better management of the talent pool the firm already has, and management has never been the City's strong suit. It does not bring in fees, which is what real people do. To paraphrase Michael Douglas in the movie Wall Street, management is for wimps.

Harvard Business Review might not think Leeds United worthy of a case study but it has done the next best thing and looked at the impact of stars on Wall Street. Harvard found that stars rarely delivered the expected goods when they moved from one firm to another for two reasons. First, they were not really stars anyway, in so far that much of their success was because they were in the right firm with the right people-at the right time. Second, having been hired for a ridiculous amount, they felt obliged to live up to their billing and alienated their new colleagues. They were like an organ transplant - healthy enough but rejected by the new body.

The trouble is that the truth, though obvious, is too uncomfortable to be accepted. I can remember research into fund management seven years ago which said that although stars claimed that 100% of success was down to them, they were lying. The reality was that only 30% of fund performance was driven by the individual and 70% was down to the systems and practices of the company, the skills of colleagues and market conditions.

I was there when the findings were presented to the industry. They went down like a lead balloon because every firm in the room knew its marketing to the gullible public was entirely based on its claim to have 'stars' who would 'outperform'. So they ignored the evidence and carried on sucking in the money.

Even the Bank of England delivers the occasional oblique warning not to take stardom at face value. The Bank's Alastair Clarke recently remarked that 'it does not always seem clear how well-founded notions of stardom really are and how consistent across a range of market conditions the performance of stars actually is'.

But still we take no notice. The records show that 40% of hedge funds go out of business within five years. Yet the dominant feature of fund management today is the lemming-like rush to put money into hedge funds so it can be managed by the 'stars'.

Property peril

WE keep going on about the bubble in the residential property market, but property advisers Knight Frank say things have the potential to be every bit as hairy in the commercial property market.

At a breakfast at Claridge's yesterday for London property players, the company said that 12 months ago institutions would have expected a double-digit return on their investments. Today, they were dealing at a little over 7% - which implies a capital value increase of 30% in a little over 12 months.

Yields have dropped by between 50 and 100 basis points since January, underlining the near-desperation of those who manage money to find somewhere providing a higher income than gilts and equities.

Weight of money lies behind it.

The fundamentals for commercial property are still not good. Vacancy rates jog along at close to 10% in the M25 Corridor, and Knight Frank forecasts that average rents could drop for another 12 months before they turn. Yet people are falling over themselves to buy. British funds have a flood of retail money coming in through property ISAs which they have to invest.

German money is still buying up London because prospects back home look bleak. Irish money comes here because stamp duty in the Republic is so high it makes speculative dealing virtually impossible. Asian money and laundered Russian money have always been here.

To cap it all, Knight Frank says the banks this year could lend £100bn on commercial property, a rise of 13% and one-and-a-half times more than the £40bn which seemed such a lot just five years ago.

If ever an accident was waiting to happen, this is surely it. But as a wise old risk manager said the other day, when bank chief executives are focused on growing the bottom line, no one wants to listen to warnings. And right now commercial property is hot.