Responding to the departure of a manager of a fund that you invest in requires some agile thinking.
Ever since Edward Johnson III’s time running Fidelity’s flagship Magellan fund, successful investment managers have often attracted followers and celebrity status.
In more recent times, the UK has produced several investment celebrities: Mark Mobius, Anthony Bolton and Neil Woodford all gained a strong following on the back of many years of consistent market outperformance.
Try as they might, asset management companies’ attempts to emphasise the robust investment processes underpinning their funds are often ignored, with many investors instead attributing fund success to an individual manager.
That, however, poses a problem. What should an investor do when a star manager leaves a fund? Several highly regarded managers have left their funds in the past year: Sarah Whitley has retired from managing the Japan-focused funds at Baillie Gifford, Tim Stevenson has departed from Henderson EuroTrust and Carlos Hardenberg has moved from TEMIT to Mark Mobius’s new venture. Most recently, Jupiter’s Alexander Darwall announced he will no longer manage the Jupiter European and Jupiter European Growth funds.
How then should an investor react when a star manager departs? It depends. A fund’s style should have a big influence on whether an investor sticks or twists. In his short book How to Pick a Good Fund Manager, John Chatfeild-Roberts, head of strategy for independent funds at Jupiter, writes: “Some firms have a regimented style of managing money, allowing little room for managers to demonstrate their flair. Others allow talented individuals the freedom to perform.”
Simon Evan-Cook, senior investment manager at Premier, says his reaction will hinge on what he and his team see as driving ‘alpha generation’ or outperformance of the fund. He adds: “We decide whether the lead manager is the sole driver of the fund’s previous track record, or whether the fund is run in a genuinely collaborative, team-based manner. In the former case, the manager leaving makes the fund an immediate ‘sell’; in the latter, we are more likely to continue holding it.”
For others, however, a change in management is a strong reason to sell. According to Rob Burdett, co-head of BMO’s multi-manager team, the default position of his fund of funds is to sell out when a manager leaves. “We sell if something major has changed. That sounds a bit brutal, but adopting a wait-and-see approach would not be the most prudent thing to do.”
Burdett advocates considering from the outset whether there is any reason not to sell and switch to a fund that isn’t tainted by change. He argues that not selling carries a potential opportunity cost, and that manager change involves risk.
It is important to note though that, as an institutional manager, Burdett will pay lower fees and taxes when buying in and out of funds. Private investors need to be more cautious about trading fees racking up.
Chatfeild-Roberts argues that a manager leaving can be a “warning sign of poor performance”. He says: “This is not an automatic sell signal, but we will investigate to ascertain the skills of the individual taking over and, where the replacement is joining from another company, whether the culture of the new firm will suit them.”
Why the departure?
When assessing a fund with a departing manager, a key question to ask is: why are they leaving? Burdett says retirements are “soft losses” and should not be too concerning as long as succession planning is in place. Peter Askew, chief executive officer at T Bailey, notes that in the case of a retirement, funds can plan the handover and communicate changes clearly to investors, so there is likely to be less to worry about. Lack of succession clarity, however, suggests that a company may have governance problems, potentially raising red flags.
Evan-Cook says Angus Tulloch’s retirement from the Asian and emerging markets team at Stewart Investors and subsequent replacement was a good example of a well-planned succession. Burdett flags up Sarah Whitley’s departure and replacement at Baillie Gifford as a well-executed and clearly communicated succession.
Even if a fund deals with the manager’s departure well, there may still be good reason to sell out of the fund. Burdett recalls that James Zimmerman, former manager of Jupiter Smaller Companies, left the fund when he decided to move to the US, as it was no longer practical for him to run a UK-focused fund. Nonetheless, Burdett decided to sell the fund. He notes that Zimmerman had a distinctive style of management and approach to investing in smaller companies, commenting: “They have hired a new manager [Matt Cable] to replace Zimmerman. No disrespect to him, but we wanted the old style, so we sold. We will watch the new manager, but we had no preexisting in-depth knowledge about him.”
Even at the best-run companies, fund managers may leave suddenly before a clear succession plan can be put in place. Askew says: “Fund managers can leave unexpectedly. You always need to know what the backup plan is, what the strength and depth of the team is, and what the key-man risk is.”
It makes sense for investors to consider any fund in the context of what they would do if its manager left. James Klempster, director of investment at Momentum Global Investment Management, says: “Do your research ahead of the event.”
This will involve looking closely at the rest of the management team. He says: “If you don’t already know who is likely to step in to run the fund if its lead managers go, the moment you hear of their departure, you are on the back foot wondering what’s going on.”
Again, though, whether a fund is run by a team or a single manager is a key consideration. Klempster says: “Ultimately the decision rests on whether supporting individuals have had an impact on the fund’s portfolio or whether returns really were the result of an individual’s actions.”
Burdett argues that even with the most process-driven funds, a manager leaving is still a key change. “Even if the fund is quant-driven, someone has done the research and ideally they should be best-placed to continue,” he says. “This is a people business.”
Many professional fund-pickers keep a shortlist of funds that they can switch to should anything unexpected happen at those they hold. Klempster says: “We keep a ‘subs bench’ of other firms, to enable us to move quickly out of a strategy if a manager leaves and we think the succession plan is not strong enough.” It’s very difficult to do detailed research on replacements quickly, leaving you stuck with your fund regardless of whether you like its succession plan or not. Keeping an eye on potential substitutes should put investors in a stronger position to react.
Follow or forget?
Should you follow a fund manager to their new destination when that fund manager is generally considered to have driven a fund’s success?
Not necessarily. Burdett points out that if they have moved to a fund that invests in a different asset class or has a different style, that fund may not fit your portfolio. Chatfeild-Roberts identifies another potential problem: that the manager may not fit in with the culture of the new fund. He writes in his book: “All too often groups hire a new manager with great fanfare, only to find months later that performance dips as the individual in question struggles to adjust to their new environment. For that same reason, we would not follow a manager if they left to join a new firm.”
Recent analysis by broker Willis Owen backs up the idea that following a departed fund manager may not be a good move. Fund managers who joined new funds between 2013 and 2016 delivered an average annualised return of -0.4%, less than their sector peers. This contrasts with an average of 2.3% annualised outperformance delivered by the same managers versus their peers over five years in their former roles.
Nevertheless, analysis also showed that funds that lost a star manager also saw performance fall back. Data from funds that saw their manager move to another fund between 2013 and 2017 showed that while the star manager was in charge, the funds in question achieved annualised outperformance against benchmarks of 3.6% on average. After they left, this dropped to 0.4%.
Evan-Cook says the decision should rest on understanding a manager’s typical way of working. If the manager takes their team with them, you can feel confident that the collective can replicate its performance elsewhere. If the manager is a one-person show, following that manager may also make sense. However, he warns: “Be wary of blindly following a manager who was part of a wider team, even if they appeared to be the ‘star’ manager.” He argues that it’s very difficult to work out how much success is down to one manager and how much was a team effort.
Should you stay or should you go now?
As a very rough rule of thumb, the following guidelines may help you make your decision.
Stay with the fund if:
• The manager is retiring and there has been good succession planning
• The departing manager and the new one have worked together in a transition period
• The manager was a team player and the team has remained
Follow the manager if:
• The manager is a solo star operator
• The whole team is going with the departing manager
• The new fund is a strong match for your needs
Seek pastures new if:
• The incoming manager appears to be making major portfolio changes
• The incoming manager is an unknown quantity
• The departing manager’s new fund doesn’t fit your portfolio well