The average fund manager only lasts around 4.5 years at his or her fund according to investment-research firm Morningstar Inc. This high turnover rate means there is a good chance one day your current fund manager will no longer be guiding your investments, leaving you to face the question: should I stay or should I go?
Why Fund Managers Matter
The whole idea of investing in a mutual fund is to leave the stock and bond picking to the professionals. Investors study the performance of mutual funds to search for the winners, the funds run by managers who - year over year - consistently beat the market and their peers. Comfortable that they have found a winner, investors place a bet for the long term.
But frequently, events don't turn out quite as expected - the manager resigns, gets transferred or dies. A big part of the investor's decision to buy a managed fund is based on the manager's record, so changes like these can come as an unsettling surprise.
Fund Manager Changes
Investors are bound to face this kind of troubling situation from time to time. In early 2002, investors with London-based HSBC Unit Trust Funds were left wondering what to do with their holdings after the abrupt departure of five flagship fund managers. Given the market-beating performance the unit trust team had chalked up at HSBC, investors were probably counting on the managers staying put for years to come.
Still, investors who stuck with the HSBC fund had little to complain about. Six months later, the fund's successors more than matched their predecessors' records, and investors who stayed on enjoyed strong performance.
But not all investors make out as well when managers leave. Another U.K. fund, Solus Special Situations Fund, topped its sector under manager Nigel Thomas. But when Nick Greenwood took his place in 2001, the fund performed below the sector average. Thomas, meanwhile, outperformed the sector with his new ABN Amro Select Opportunities fund until he left it to go to yet another mutual fund.
So, which one is typical: the HSBC or the Solus case? There are no rules about what happens in the wake of a manager's departure. It turns out, however, that there is strong evidence to suggest that managers' real contribution to fund performance is highly overrated. Managers are often turned into stars by marketing departments. So, when managers move on, it is big news. But investors should not rush to hasty decisions about whether to keep their money in the fund, follow their manager or change their investment entirely. (For more insight, read Will A New Fund Manager Cost You?, When To Sell A Mutual Fund and Assess Your Investment Manager.)
Perspectives on Fund Manager Tenure and Performance
Funds are promoted on their managers' track records, which normally span a three to five-year period. The significance of these records should be taken with a grain of salt. Performance data that goes back only a few years is hardly a valid measure of talent. To be statistically sound, evidence of a manager's track record needs to span, at a minimum, 10 years or more.
For example, research company Morningstar compared funds that experienced management changes between 1990 and 1995 with those that kept the same managers. In the five years ending in June 2000, the top-performing funds of the previous five years tended to keep beating their peers - despite losing any fund managers. Those funds that performed badly in the first half of the 1990s continued to do badly, regardless of management changes.
The research of Klaas P. Baks, finance professor of Wharton School of Business, indicates that the value managers add is small - 30% of performance can be attributed to managers, 70% to the fund. Baks argues that while mutual fund management companies will undoubtedly continue to create star managers and tout their past records, investors should stay focused on fund performance.
The mutual fund industry may look like a merry-go-round of managers, but that shouldn't worry most investors. Many mutual funds are designed to go through little or no change when a manager leaves. That is because, according to a strategy designed to reduce volatility and succession worries, mutual funds are managed by teams of stock pickers, who each run a portion of the assets, rather than by a solo manager with co-captains. The American Funds, for instance, manages its funds this way. (For more on this strategy, see Mutual Fund Management: Team Players Or All-Stars?)
Some fund groups, like Fidelity, make it a practice to promote successful managers to ever-bigger funds and to quickly get rid of poor performers. Changes are not necessarily a sign of trouble. Meanwhile, even so-called star managers are nearly always surrounded by researchers and analysts, who can play as much of a role in performance as the manager who gets the headlines.
Advice for Investors in Managed Funds
Don't forget that if a manager does leave, the investment is still there. The holdings in the fund haven't changed. It is not the same as a chief executive leaving a company whose share price subsequently falls. The value of the fund will not fall overnight. The best thing to do is to monitor the fund more closely to be on top of any changes that hurt its fundamental investment qualities.
In addition, don't underestimate the breadth and depth of a fund company's "managerial bench." The larger, established investment companies generally have a large pool of talent to draw on. They are also well aware that investors are prone to depart from a fund when a managerial change occurs. Morningstar does a good job of tracking changes in fund management, and its opinions on such events can be found in the analyst commentary section of its mutual fund reports. (For more on Morningstar's reports, see Morningstar Lights The Way.)
Lastly, for investors who worry about management changes, there is a solution: index funds. These mutual funds buy stocks and bonds that track a benchmark index like the S&P 500 rather than relying on star managers to actively pick securities. In this case, it doesn't really matter if the manager leaves. At the same time, index investors don't have to pay tax bills that come from switching out of funds when managers leave. Most importantly, index fund investors are not charged the steep fees that are needed to pay star management salaries.
Mutual Funds & ETFsLearn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
Mutual Funds & ETFsLearn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
Mutual Funds & ETFsLearn about some of the mutual funds in Vanguard's lineup that are popular among 401(k) investors, and find out why you should consider them.
Mutual Funds & ETFsDiscover the top Vanguard target-date retirement funds with target dates in 2020, 2030 and 2050, and learn about the characteristics of these funds.
Mutual Funds & ETFsDiscover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
InvestingReal estate investment trusts offer a unique way for investors to own a real estate portfolio without the risks of owning single properties.
Mutual Funds & ETFsLearn about Vanguard funds that are good choices for a Roth IRA. Read about how Vanguard funds make it easy for investors to diversify their portfolios.
Financial AdvisorsTarget date funds have grown in popularity as an investment of choice among 401(k) investors. Here's a closer look at Vanguard's offerings.
Mutual Funds & ETFsLearn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
MarketsMany investors are looking at emerging market (EM) stocks and wonder if it’s time to step back in, while others wonder if we’ll see further declines.
The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
Whether buying or selling shares of a fund, mutual fund trades are executed once per day after the market close at 4 p.m. ... Read Full Answer >>