SHOULD INVESTORS FOLLOW THEIR FUND MANAGER?
According to Morningstar Inc., an investment research company, an average fund manager only lasts about 4.5 years at his fund. So do not be surprised if one day, the manager decides not to oversee your investments.
The concept of investing in a mutual fund is to let the money managers do the bond and stock picking. Investors assess the performance of these funds to look for winners. And if they feel they have found a winner, they place a bet for the long term.
But there are some events that can affect. The manager either resigns, transfers to another assignment, or passes away. Since the manager’s record is one of the major basis for investment decision-making, abrupt changes like these can unsettle investors. Whether they like it or not, investors have no choice but to face and overcome this dilemma.
Majority of mutual funds are designed to go through little or no change in case a manager leaves. The fund is managed by a group of stock pickers, who operate each part of the assets. Therefore, the significance of their managers’ track records is similar to a grain of sugar.
Granted that your fund manager leaves all of a sudden, does it make sense to still follow your fund manager?
Solus Special Situations Fund outshined its sector under Nigel thomas. But in 2001, Nick Greenwood took over the UK fund. During his tenure, the fund performed below the sector average. But when Thomas managed ABN Amro Select Opportunities fund, it outperformed this sector until he left it to find another fund to be managed.
Another example: Five flagship fund managers of London-based HSBC Unit Trust Funds swiftly left in early 2002. The fund’s investors were clueless on what to do with their holdings. At that time, the unit trust unit holds a market-beating performance. Investors probably had no choice but to rely on the unit’s good record and the managers who stayed for their future. Six months later, the fund’s successors surpassed the records of their predecessors, and investors who opted to stay enjoyed strong performance.
No rules have been set on what to do in the light of a manager’s departure. But these two events strongly show the managers’ true contribution to the fund is hugely overrated. Marketing departments do everything in their might to make their managers so popular that if they leave, it becomes a big matter.
Nevertheless, investors should not decide right away whether to keep their money in the fund, follow their manager, or change their entire investment. Anyway, the investment remains there and the fund’s holdings have not changed. Its value won’t also decline overnight. But when it happens, the best thing to do is to monitor more the changes in the mutual fund to pinpoint factors that can influence its fundamental investment qualities.
Also, underestimate not the ability of a fund company’s managerial bench. Normally, bigger, established investment firms have a large pool of talent to draw on because they know most investors tend to leave the fund if a managerial change takes place.
But if you worry too much about management changes, turn to index funds. The fund purchases bonds and stocks that trail a benchmark index, including the S&P 500. Since this investment does not rely on managers to choose the securities, any change in the management won’t matter. Index fund investors need not to pay tax bills that occurs from leaving the fund when managers leave. And they are not charged the steep fees for compensating the fund managers.
Does it make sense to follow your fund manager?
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