Morningstar has a message for financial advisors and investors concerned about manager changes on actively managed funds: Don’t worry.
Its report on The Aftermath of Fund Management Change found that “there is no change” in a fund’s future performance following a change in fund management even though investors may react by withdrawing some money from such funds.
“The fund industry handles succession planning far better than investors react to such changes,” the report says.
Morningstar, which often puts funds on watch lists when a manager changes, studied gross returns and growth of funds one, three, six, 12 and 36 months after a fund management change of U.S. open-end actively managed equity and fixed income funds from January 2003 to December 2016 to determine the persistence and longevity of an effect.
It found “zero relationship between a management change and future returns over the next month up to the next three years … for all different types of management changes.” Even the removal of a manager with extensive industry experience had little impact.
The evidence appears “to strongly support the hypothesis that fund success does not depend on any single individual,” according to the report. There are several reasons that change of manager or even managers has little or no effect on fund performance.
One key factor is the fact that many mutual funds are often run by a team, not a single manager, according to Morningstar.
“Running a fund is much more team-driven today than it ever has been,” according to the report, which notes that 75% of actively managed U.S. equity and fixed income funds are run by teams, which include a supporting cast of research analysts and risk management professionals as well as portfolio managers. “Funds are able to maintain their consistency, even when one of the names at the top changes.”
Even the remaining 25% with a single manager listed “are assumed to be supported by a research staff with strict processes and restrictions for what stocks fit into their narrow mandate,” according to Morningstar. “Replacing the most senior member of the cast will not stop the investing process.”
Succession Planning and Long-standing Fund Mandates
“Most often, manager changes appear to be planned and thought out in advance,” according to the report. Research analysts are often groomed to eventually take over as portfolio manager, but even if the replacement is not an analyst already working on the fund, the analysis used to manage the fund will most likely continue.
In addition, the new manager will need to follow the fund’s purpose, often defined by narrow mandates that won’t change. “Given a fund’s stated objective, there is a stated, and restrictive, range of capital deployment by which managers must abide, “ the report notes.
Lessons for Investors and Advisors
It’s not uncommon for individual investors, advisors or wealth managers to react to a fund manager change by withdrawing money from the fund, but they shouldn’t if the manager change is the only reason they’re making that move, according to Morningstar.
“If a fund’s process is operationalized; if its parent company has invested in their staff; if the fund’s fees remain unchanged, then investor should probably take a ‘wait and see’ approach.”
They should consider whether the manager who’s leaving or has left is a singular “personality or a highly specialized individual” whose skills could not be replicated by others and whose absence could impact performance. “In most cases the answer will be no,” according to Morningstar.
If that is the case and if the fund is part of a taxable account, investors and advisors also need to consider the tax consequences of withdrawing money from the fund. Otherwise they risk “an unnecessary tax bill.”
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