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July 24, 2017 at 12:07 PM
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.
(Related: Can This Fee Structure Save Actively Managed Funds?)
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.
Teamwork
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.”
