The cult of the investment guru

Former fund manager David Varley explores how the asset management industry has historically been dominated by its stars

This summer a number of ticket-holders for the Olympics, billed as the "Greatest Show On Earth", expressed dismay at the requirement that they arrive two hours early for their event. For fans of high-achievers in the investment world, however, doing so would rank as only a minor inconvenience.

If, for example, you had made the pilgrimage to Omaha, Nebraska, to hear the legendary American investor Warren Buffett speak at his annual conference, you might have worked out that you needed to make it to the massive CenturyLink Center a little ahead of the advertised start time of 9am. Given the popularity of the event, you might decide on a 6am arrival, congratulating yourself on the intensity of your dedication. So you would be understandably perplexed to find yourself, three hours early, standing shivering in the Midwestern wind, already several thousand people from the front of the queue. You might, if you were lucky, just about squeeze into the enormous main hall, perhaps right at the back of the second tier, in among the hordes of amateur investors from all over the world. Others, denied the physical presence of their idol, would have to make do with the plasma screens in the overspill rooms.

In addition to this scrum of devotees at Buffett's conference, there also exists an annual charity auction at which the prize is a lunch with the Great Man. The winning bid in 2012 was $3.46 million (over £2 million). For a two-hour lunch. Perhaps the victor also splashed out on one of the $100,000 tickets available for the Ira Sohn Conference in New York this year, at which rock stars of the hedge fund industry (such David Einhorn, William Ackman or John Paulson) each share a single investment idea with the audience.

This cult of the individual is everywhere you look in the asset management industry. Important financial decisions in other spheres - a country's monetary policy, or major spending commitments by corporations - tend to be decided by boards and committees, but when it comes to equity and bond markets, investors seek again and again to tie their fortunes to a single, incredibly talented professional; a sage. If you're looking to reach the top in asset management, you may well find yourself moving into the orbit of these celebrated individuals, so it's worth investigating the phenomenon in more detail, and looking at how it affects companies and careers in the industry.

Tolerably rich, and quite uncontrolled

The investment seer is by no means a modern invention. A Scottish aristocrat by the name of John Law, on the run having killed a man in a duel over a married woman, somehow re-emerged in early 18-century France as the leading investment advisor of the day. Described by Charles MacKay in his book on the subject as "very young, very vain, good-looking, tolerably rich, and quite uncontrolled", Law drew a good proportion of the French establishment and, eventually, the French state itself into a doomed scheme to invest around the Mississippi River Delta in Louisiana. At the height of his fame, a fairground sprung up around his office, to provide refreshments and entertainment to the crowds waiting in line to come in and sign up for his schemes. A few years later he was fleeing France, fearing justifiably for his life, and he died almost penniless (having invested all his wealth alongside that of his unfortunate clients).

Almost exactly two hundred years later money was once again pouring into the securities markets and, above all at this time, into shares traded on the New York Stock Exchange. Much of the cash found its way into investment trusts, many of which advertised themselves using the names of notable economists and professors. One of the largest, American Founders Group, trumpeted the involvement of one Professor Edwin W. Kemmerer, whose impeccable Princeton credentials attracted plenty of clients but could not stop the trust's stock price tumbling from $75 in 1929 to 75 cents by 1935. The failure of such illustrious and supposedly omniscient men during the 1930s must have reminded savers of the famous fraudsters of financial crises past, as well as the monstrous investor-villains of Victorian fiction, such as Charles Dickens's Mr Merdle in serial novel Little Dorrit.

It may be the colourful scoundrels who are best remembered from this second world war period, but the second half of the twentieth century, with its prolonged economic boom, restored the reputation of the star fund manager once again. In America, Fidelity's Peter Lynch became not only the manager of the country's largest mutual fund, but also a bestselling author. His books, including One Up On Wall Street, promoted the understandably popular idea that ordinary Americans could compete with the professionals, provided they were willing to do a little extra research on companies they came across in their day-to-day lives. In particular he popularised the enticing notion of the "10-bagger" - a stock that would increase in value tenfold, WalMart had famously done for his fund - and encouraged his readers to go out and find such companies for themselves. In the thirteen years he ran Fidelity's flagship Magellan fund (1977-1990), Lynch returned an average of 29 per cent per year to his investors, beating the S&P 500's performance in all but two of those years.

Lynch's closest English equivalent would be Anthony Bolton, also of Fidelity, who ran his UK Special Situations fund between 1979 and 2007, returning an average of nearly 20 per cent a year. His patience and rigorous attention to detail developed into such a powerful brand that when he announced he would return from "retirement" to run a fund in China, a new region for him, his firm was able to raise more than half a billion pounds from investors keen to piggyback on his expertise. Like Lynch, Bolton also wrote a book about his investment philosophy, which remains in great demand in the bookshops of London's Square Mile.

Supermen and Superwoman

Similarly-styled images of both Lynch and Bolton adorn the covers of my editions of their respective books. Both are smartly suited, smiling and, unlike the stereotypical cover star, reassuringly grey-haired (read: wise and experienced). The portraits dominate both covers, and play strongly to the notion of the investor-seer, which these two men, along with Warren Buffett and a handful of others, helped revitalise in the latter half of the twentieth century. It's a tactic that investment companies across the world use in their advertising. Particularly in booming markets, their adverts often display pictures of the professionals who will be taking good care of their clients' money. Where the managers are too young to convey sufficient experience, then an intense stare denotes the seriousness of their commitment, often paired with a prominent pair of glasses as if to suggest an ability to see what everyone else is missing.

Firms become built around these individuals. Fund manager Nicola Horlick first became a media star in the 1990s, when she became widely known as "Superwoman" for her remarkable achievement of raising six children while maintaining a top-tier investment career. Even fifteen years later, it's rare to see her current firm referred to as anything other than "Nicola Horlick's Bramdean Asset Management." Companies compete with one another to offer lavish salaries to, and to poach, managers with good track records and name recognition, which can lead to instability at small and mid-sized investment houses, if they build a strategy around one or two star managers who are subsequently offered more money elsewhere. The firm's assets often walk out of the door with the brand name fund manager, which can be hugely frustrating to others in the company, who find their career fortunes tied to the potentially capricious "talent".

This phenomenon creates both opportunities and pressures for the young asset management professional. Those who hope one day to run their own funds have to consider how to present themselves to an industry and a client base who are looking for stars. Sometimes the requirements can be almost amusingly superficial: Do your top button up! Buy some smarter shoes! However, if you thought all you needed to do was manage investments well, the hours and hours of presentation training might come as a surprise. Spending a whole afternoon watching re-runs of yourself on video can be a chastening experience, particularly when you realize that the pose you are coached to adopt on stage (two hands held out in parallel in front of the midriff) is pretty much Tony Blair's default stance. If all the presenting doesn't sound like you: don't worry. If you are somewhere close to success, you will get plenty of practice. By the time it comes to the fifth or sixth client meeting of the day, you will be hitting the punchlines with ease.

Difficult global stock market conditions in the last five years have seen the reputations of several would-be superstar fund managers shrivel. Some long-established names have struggled for the first times in their careers. Indeed in 2010, Vanguard Group, which has consistently argued against the probability of an individual manager being able to sustain market-beating returns over time, overtook Fidelity and its celebrated names to become the largest US mutual fund provider. History suggests, however, that though its popularity might fluctuate, the cult of the investment guru will remain with us indefinitely in some form. The industry will continue to be keen to create these stars, and investors will continue to want to believe in them.