Interactive Investor

Fund managers that jump ship struggle to repeat success

22nd May 2023 11:56

by Kyle Caldwell from interactive investor

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We explain how investors can assess whether to hold or fold when a fund manager leaves.

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When a fund manager leaves for pastures new investors have a dilemma on their hands – stick or twist?

There are many things to consider that can help DIY investors come to a decision (with my top tips listed lower down this article). However, according to a new research report by Morningstar, fund managers struggle to repeat their past success when joining a new firm.

The data firm looked at fund managers that had changed shop at least once, with track records going back to 1990 in the United States and 2002 in Europe through to the end of June 2022.

In total, there were 518 fund managers had managed money for at least three years at both their old and new firm, and 195 fund managers with a minimum track record of five years at both shops.

Most fund managers who jump ship (either voluntarily or involuntarily), have an enticing track record to "sell themselves" elsewhere, Morningstar notes. The data firm adds that this makes it “tempting for investors to follow them”.

After crunching the numbers Morningstar found that fund managers show short-term success when they take over a new fund. It points out the investment style favoured by the fund manager – such as growth or value – tends to initially help boost performance.

In addition, the amount of money in the fund is usually smaller to begin with at the new firm, which gives fund managers greater freedom. 

The data firm notes: “It is likely that they are still surfing on the successful investment style that led them to be hired in the first place.

“They are also benefiting from managing less money in the first years at their new house, making it easier to outperform.”

However, over longer time periods Morningstar found that fund managers tend to produce “less alpha at their new firm compared with what they achieved at their former employer”.

It adds: “Investors should be doubtful that past success can be easily replicated in the long term.” 

Nonetheless, the study also found that investors typically have a better outcome following the fund manager than sticking with the old fund.

Morningstar’s study found that “on average, the alpha at the old fund after the departure is lower compared with how managers performed at their new house.”

It added: “There are a few managers who successfully transitioned to their new firm and continued to generate excess returns for investors, but relying purely on initial track record to identify the best ones to follow looks like a loser's game.” 

Should I follow the fund manager – key things to consider

So how can investors assess whether to hold or fold when a fund manager jumps ship?

Firstly, take a step back

Ask yourself why you bought this fund or investment trust in the first place, what you are getting from it, and whether this is likely to continue under new management.

Do not make a hasty decision. If you are unsure, you may consider putting on hold any regular investments you have flowing into the fund, while considering what to do next.  

Key-person risk

Has one fund manager been highly influential in calling all the shots, or has it been more of a team approach, with a couple of named co-managers or deputy fund managers? If it’s the former, then a fund manager leaving for another fund firm or retiring, is arguably more of a blow.

Is the entire team jumping ship?

Sometimes whole teams are poached by other investment firms. This is arguably a sign to sell, as a lot of the expertise will have to be built from scratch.

In addition, the culture that’s been built up by the team will also depart with them.

Is the fund manager leaving to join a smaller firm?

Some fund managers depart big fund firms for a boutique, so they can be a bigger fish in a smaller pond.

Backing a boutique has the advantage of the fund manager’s interests usually being more directly aligned with fund performance. This is due to the fact that he or she typically has a bigger stake in the overall business.

Another potential benefit is that boutiques usually have more independence in the way they manage assets. In contrast, in larger management groups there can be pressure to toe a corporate line.

Of course, greater freedom is not always healthy. Particularly if there is a lack of oversight in how the fund manager invests and if the manager is not being challenged appropriately.

Consider alternatives

While deciding whether to stay or follow the fund manager to a new firm there’s no harm in sizing up potential fund alternatives. After all, it can take several months for a new fund to be launched.

Who is behind the lead fund manager?  

Sometimes it is bigger loss if the deputy manager leaves, as opposed to the lead fund manager.  Therefore, it is important for DIY investors to research as much as they can about a fund and its management team, not just the big name above the door.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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