If you're quick to move clients out of a fund because of a management change,
a new paper by Morningstar has a word of advice for you: Knock it off.
The paper, released Monday, looked at returns from actively managed stock and bond fund from 2003 through 2016 and found no relationship between any type of management change and future returns. "If advisers are in charge of moving money, they are overreacting to management changes," said Morningstar quantitative analyst Madison Sargis.
Management changes make big news, such as when
Bill Gross left Pimco in 2014. (The study notes that the media — ahem! — makes too big an issue out of management changes, too).
"Management change," in the study, could mean anything from the departure of a long-time manager to an addition or removal from a management team. Why do management changes have little effect on future performance?
• Seventy-five percent of all actively managed funds are team-managed; even with the 25% that list a single manager, it can generally be assumed that the manager has a team of analysts behind her.
• Most funds follow a mandate set out by the management company: It would be surprising if the fund remade its portfolio wholesale after a departure. "If the investment process is sound, others on the team will come to similar conclusions," Ms. Sargis said
• Funds have gotten much better at succession planning. During the 1970s and 1980s, many funds were built around iconic investment personalities such as Peter Lynch at
Fidelity Investments, John Neff at Vanguard Windsor and Michael Price at Mutual Shares. "If the fund's pipeline [for new managers] is good, they will train employees in the same way, ensuring continuous continuity in performance," Ms. Sargis said.
Management changes do have an affect on fund assets, however, meaning that investors overreact and penalize funds that have made staffing changes. Not surprisingly, the
largest funds experience the largest outflows after a management change.
Curiously, top-performing funds usually get the benefit of the doubt from investors, the study said. Investors are willing to look past the change in fund leadership when the portfolio has been successful. The negative management change signal is offset by the positive high-alpha signal. Funds achieving high alpha at time of management change would experience less outflows than such a fund with low alpha.
If a client owns a fund in a taxable account, switching funds because of a management change can be a particularly egregious error. After all, the client will owe taxes on any gains in the old fund, and — barring a large increase in fees after the change — the tax hit will probably overwhelm any advantages a new, similar fund could offer.
The takeaway for advisers: "Be calm and wait, rather than acting hastily," Ms. Sargis said.
