If your fund's star manager quits, your returns will likely be lower

An analysis of 15 investment funds found that after a star manager left, relative performance declined. 

From at least the days of Edward Johnson III's time managing Fidelity Magellan, investors have been on the lookout for so-called star fund managers. Through an ability to seemingly provide consistent market-beating returns (often combined with widely respected market commentary), these star fund managers are often able to gain a cult-like following among investors. 

The phenomena has often been criticised, with many sceptics pointing out the fund managers that gain star status usually end up losing it after some time. Whether it be due to a change in market climate reducing the effectiveness of their investing style or just dumb luck, star managers often see their hot streak come to an abrupt end. 

However, according to one analyst, star fund managers do seem to add value to funds they manage. An analysis of  15 investment funds that had star fund managers leave their post at some stage between 2013 and 2017, showed the level of out-performance dropped dramatically after their departure. 

The data shows that while a star fund manager was in charge, the fund in question had annualised outperformance against relative benchmarks of 3.6% on average. After they left, this dropped to 0.4%.

Source: interactive investor   Past performance is not a guide to future performance

According to one commentator:

"There is little doubt that a small band of star fund managers can have a huge positive impact, and research shows what happens when they leave." 

However, investors should be aware of other potential causes behind the discrepancy in performance. Investment styles often fall out of favour, even those of the most successful fund managers. The decline in the ability of this style to produce value may be behind the star manager's retirement or departure from the fund (bond manager Bill Gross’s retirement being the latest such example).  

This style, however, may be similar to that of the fund. If so, the new manager is likely to face the same trouble, assuming the style remains out of favour. As a result, poor performance will also follow.  

At the same time, the departure of a star manager can harm the reputation of a fund and therefore the performance of it under the new manager.

With the star manager having a cult-like following, redemptions are likely to follow their departure. Alternatively, if a star manager leaves after their style falls out of favour, meaning they experience a performance "bad patch", redemptions under new management may still continue as investor interest turns elsewhere. 

Each situation is unique so it is important to consider all the facts before deciding what the best course of action to take is.

Investors should be aware that investment history is littered with fund managers that have departed and often retired following a period of poor performance, including names such as the UK's Anthony Bolton or most recently American bond fund manager Bill Gross.

However, while investors should still remain cautious about chasing after fund managers that can provide super-human returns, the research does underline the importance an individual manager can have on a fund. 

Investors should always review a fund when a manager leaves and a new one takes over as it is unlikely the performance will be replicated at least in the early years. However, it also doesn’t mean that you should automatically follow the fund manager.

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.