Connections for Success



My Fund Portfolio Manager is Leaving! What Should I Do?
Peggy Vyborny

When Alex’s financial advisor informed him that the portfolio manager (PM) of a high-performing mutual fund in his portfolio was leaving, Alex became nervous. With good reason: A quality PM can be influential in the overall success of an investment plan.

Before giving up on the mutual fund, Alex and his advisor discussed several aspects of how a PM can affect a fund and whether the fund can continue to deliver similar returns with a different PM.

A PM’s Influence

First, Alex’s advisor explained that they will need to determine how important the PM was to the fund. For example, when famed manager Peter Lynch stepped down from the helm of Fidelity’s Magellan Fund in May 1990, it was hard to imagine anyone else duplicating Lynch’s stock-picking prowess, which produced an average annual return of almost 30% during his 13-year tenure. That said, investors who remained with Magellan saw it continue to outperform the market — albeit by much smaller margins — under its next two PMs.

At the opposite end of the spectrum, there is generally less cause for worry when an index fund undergoes a PM change. With a passive, systematic strategy such as indexing, a new PM can be expected to more easily pick up where the previous PM left off.

Another point Alex and his advisor considered is whether his fund’s former PM was working independently or as part of a team. While a team approach is not necessarily better, the departure of one co-manager in a group of, say, five is less likely to result in significant changes in performance and strategy than when a “lone wolf” manager departs.

Management Style Shifts

Alex’s advisor warned that a sudden shift in management style under a new PM should raise red flags. First, it might indicate turmoil or disorganization at the fund company — especially if it is one in a series of recent PM changes.

Second, no matter how capable a fund’s new PM is, the investment may not be the right option for Alex if it no longer suits his asset allocation needs. For example, if a large-cap growth fund bought five years ago has morphed into a large-cap value fund, Alex’s portfolio might become overexposed to certain holdings and underexposed to other parts of the market.

He may face another problem when a fund’s management style remains the same but represents a new area of focus for the incoming PM. If, for instance, an international stock fund’s new PM’s previous experience was limited to domestic stock funds, a learning curve is to be expected.

In this situation, higher turnover and more index-like performance is likely for a while, because a new PM will tend to bring the fund’s positioning more in line with its benchmark while getting up to speed on a new group of securities.

In fact, while the new PM might have some experience with similar funds, it is relatively rare to land a PM with a long, successful tenure at a fund with a comparable strategy. Despite this obstacle, replacements may turn out to be good long-term managers in their own right.

Prior Performance

Last, Alex’s advisor addressed factors affecting a new PM’s track record — that is, not all are reasons for concern. Sometimes a track record might be “poor” just because his or her investment style is temporarily out of favor.

It is also important to look at how a fund’s size may affect a new PM’s performance. For instance, a small-cap growth manager who enjoyed great success overseeing $50 million in assets might struggle when taking over a $1 billion fund. If the fund was purchased long ago and has grown significantly since, a managerial change may be a good time to revisit whether a smaller and nimbler substitute is available.

A Fair Shot

Ultimately, Alex’s advisor urged him to give his new PM a fair shot before selling off the fund. Doing so will not only allow the PM time to get acclimated, but also avoid the tax liability and applicable withdrawal charges of a fund sale.

For help with the steps to take if your portfolio manager is leaving, contact Peggy Vyborny at [email protected] or call her at 312.670.7444.

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