Mutual Funds Swapping Managers at Alarming Rate
In many ways, 2013 has been smooth sailing for mutual fund investors. Indeed, as the market has soared to new highs, investors have been handsomely rewarded.
But behind the scenes, something rather unusual has been happening: Funds have been shaking up their management teams at an alarming clip.
According to an analysis prepared for U.S. News by Morningstar, 665 funds have swapped out at least one manager so far this year. If the trend continues at its current rate, that number could swell to more than 1,000 by the close of the year. By comparison, only 783 funds experienced such a change in 2012. In 2011, that number was 747, and in 2010, it was 626.
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In compiling the numbers, Morningstar looked for instances in which at least one manager left a fund and another quickly joined. The numbers suggest, but do not conclusively prove, cause and effect. In other words, they do not establish with certainty that the manager who joined came on to replace the departing manager. Nor do they show whether the departing manager retired or was fired, or whether the departing manager was the lead manager or played a supporting role.
Even so, the numbers should be watched by fund investors. Management changes can have a wide range of implications. First, a new manager can mean a change in a fund's strategy, which in turn can mean that a product that was once a good fit for an investor no longer belongs in that investor's portfolio.
New management is also likely to impact a fund's performance. Indeed, according to a report by the United Kingdom's Pensions Institute, when a fund loses a talented manager, investors are likely to suffer. "Losing a top-decile manager results in a 1.44 percentage points lower performance in the following year compared with winner funds that keep their star manager," noted the report, titled "Why Does Mutual Fund Performance Not Persist? The Impact and Interaction of Fund Flows and Manager Changes." The report, published in 2010, looked at the performance of 3,946 U.S. equity funds between 1992 and 2007.
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On the other hand, replacing an ailing manager will often improve performance. "Firing an underperforming manager ... improves loser-fund performance by an average of 0.96 percentage points in the following year relative to loser funds that keep the same manager," according to the report.
In addition to the volume of funds experiencing management changes in 2013, another notable metric is the number of large, established funds that are undergoing shakeups.
According to S&P Capital IQ, 40 U.S. stock funds with more than $500 million under management have seen management changes so far this year. "Mutual fund manager changes are nothing new, but in the first six months of 2013 there were a number of high-profile funds that have replaced existing managers with others at the firm," S&P notes.
According to Todd Rosenbluth, director of mutual fund research for S&P Capital IQ, an investor whose fund undergoes a management change should carefully study the new management team's track record.
As an example of a recent change that should give investors pause, Rosenbluth points to Lord Abbett Affiliated, a fund that is more than 60 years old and has more than $7 billion under management. This year, following a prolonged stretch of mediocre performance, new managers Walter Prahl and Rick Ruvkun took over.
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Rosenbluth's main concern is that both of the new managers have only limited experience running a strategy that is similar to that of Lord Abbett Affiliated. "It's hard to view that change and ... say things are going to get better," he says. "But only time will tell."
Overall, though, Rosenbluth suggests that it is often wise for investors to give the new management team a bit of time to prove itself. "Whether or not the new manager is going to be any good at running your fund or running the investment style is going to take some time [to figure out]," he says.
