By Dan Hallett on January 16, 2014
Mutual fund companies have a love-hate relationship with so-called “star fund managers”. The love stems from such managers’ typically strong performance and their ability to tell good stories about how they invest clients’ money.
Both factors foster a loyal following from financial advisors and their clients. But there is no love lost when the star disappoints or, worse, leaves taking that valuable loyalty (and lots of investor money) to a competing firm. Accordingly, it has long been debated how investors should deal with a change in lead managers – particularly when there is an opportunity to follow and stay invested with the departing star.
Many argue that the individual in charge of a fund’s day-to-day management has more influence than the organization employing her. Others say that the firms that employ star managers have more influence than it appears, in part by providing the tools and supporting operations and analyst personnel. I have never generalized since there are often too many case-specific variables. But I have laid out a framework and process for assessing such changes and deciding on a course of action.
I examined 13 manager changes that affected 14 funds over the past dozen or so years. I compared the subsequent performance of each of the 14 ‘old’ funds with the respective star managers’ new funds. The time period studied began on the date the departing ‘star’ began running a new fund through January 8, 2014.
In 8 of the 14 selected funds, it paid to sit on your hands and let the fund sponsor choose a replacement manager. These instances are highlighted in the below table (click to enlarge) – which contains all of the stars that have so far underperformed their former funds. It begins each section with the ‘old’ fund affected by the manager departure followed by one or two funds managed by the old fund’s former lead managers. Where possible, I also include stats for each fund from the 2007-09 bear market and subsequent recovery (through December 2013). Also, all of the “total return” figures are simple – not annualized – returns. Finally, all performance figures were obtained using GlobeInvestorGold.
In those eight instances of underperformance, star managers lagged their former funds by a median 1.5% per year. Managers like Geoff MacDonald and David Taylor, for example, have generated such strong returns that I wrongly assumed that they’d outpaced their former funds. That said, most of the instances in that first table cover a short time frame so it’s not meaningful to extrapolate from these results.
Still, it seems that following following star managers can be a good move, as the next table illustrates. Click on the table to enlarge it.
Of the fourteen instances shown across both tables, seven ‘new’ funds are being managed by star managers that launched their own start-up firms. Only two of the start-ups I examined (EdgePoint Global and Black Creek) have posted better performance than their successors – by a margin of 625 basis points annually. While a larger number of stars underperformed their successors, this group has been on their own for a shorter time period (just 3 years on average) and lagged by a smaller margin (150 basis points annually). In time the statistics may well converge or swing closer in stars’ favour.
There is no magic to dealing with such major changes in lead management. Even my small sample shows not much more than a 50/50 chance of picking the outperformer. But following a decision-making process that is grounded in fundamentals and sound research will take your focus away from a manager’s presentation skills and star label – which will improve your chances of making sound investment decisions.
See also: The upside of manager turnover (March 2013)
Note: The second table in the original version of this blog post showed Michael Hatcher as the lead manager of Trimark Fund-A throughout the measurement period shown. He has only managed the fund since March 2012.
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