When Portfolio Managers Leave a Fund, Should You?

“We are not worried by such an event,” says Natalie Bertrand, president of advisory firm AN Bertrand, on the prospect of losing a portfolio manager in a fund.

But a departing manager can also be “the equivalent of an earthquake”, says James Gauthier, head of product research and oversight at IA Wealth.

When should investors be worried?

Firm > Manager?
For Bertand, the key concern is the initial choice of the mutual fund firm. “We choose firms for their stability and the quality of their funds so as to not experience such changes,” she continues. We consider that changes are made to preserve or improve performance. If a manager doesn’t perform well, we can’t know it as well as the firm itself.”

Francis Sabourin, director and portfolio manager at Richardson GMP is of the same school. Fund manager changes “rarely happen to me, he says. I buy a fund and its team, not a specific manager. If one member leaves, the team stays.”

Talent is Valuable
For managers like Gauthier, a departure is a very big deal; all alert systems switch to “on”. Losing talent can be a defining moment. 

It’s also the case for Peter Tsakiris, president of Whitemont Financial Services Firm. Not only does the departure of a portfolio manager raise a priority alert, but so does the arrival of even a secondary manager. “If the star of the fund is about to retire or no longer has the willingness or ability to manage the fund, to avoid losing investors, firms will add a new manager to the lead manager. We’ve found that, even if the star manager remains, decisions are now made by the new manager.”

That’s why Tsakiris is attentive to any manager change. “If it’s not the same manager who makes final decisions, the risk of straying away from the mission increases, he says. Because any new manager will ultimately impose his philosophy on a fund.”

For Tsakiris – as well as for the other commentators – the key issue is continuity of the mandate. Bertrand and Sabourin rely more on the firm to ensure this continuity. Of course, there are always exceptions. Sabourin gives the example of a growth style manager who replaces a value style manager, something that would clearly raise a flag. “Such an occurrence could result in a high turnover of securities with tax consequences for clients,” he notes.

Checking Track Records
Gauthier and Tsakiris rely on their own assessment. For example, the latter carries out a quantitative and qualitative analysis of the new manager. Quantitatively, he wants to make sure that the new manager has consistently outperformed his benchmarks and peers during his previous mandates. Then, qualitatively, “we analyze the manager’s philosophy to ensure that he follows it to the letter,” he adds. Whitemont avoids adopting a manager whose superior returns could be linked to extrinsic factors, such as playing a hunch on a stock that is a temporary darling. 

The primacy given to continuity of style and philosophy is the key variable that explains why Tsakiris often prefers to follow a departing manager in his new assignment rather than stay with the fund that the manager is leaving. Gauthier moves in the same direction as Tsakiris, opening the perspective a tad more: “At the outset, when you make an investment, make sure that you have a thesis for it. Hopefully, that will be more than just betting on a manager’s performance over the last few months. If a manager leaves, you must ask: is my thesis compromised. If your thesis is the manager himself, then do leave.”

Ian Tam, director of investment research at Morningstar, aligns with Tsakiris’ and Gauthier’s observations and proposes a 3-tiered framework to filter any news of management change. “For an actively managed fund, managers (and people) are one of three ‘pillars’ that we use to gauge a fund’s ability to produce positive net-of-fee alpha. In this framework, the “people” pillar is worth 45% of the rating, a ‘parent’ pillar is also worth 45%, while a ‘process’ pillar is worth 10%.”

Is There an ‘I’ in the Team?
If a manager leaves, Tam explains, one might see that as a change only in the “people” pillar, but Morningstar analysts pay attention to the whole team (including supporting portfolio analysts), not just the portfolio manager. So, if the team indeed has a robust succession plan in place, “we might not see that pillar affected, whereas if it’s just a single portfolio manager (key man risk) then of course we’d see that change. However, if it was just one person running the portfolio we might not have given a good ‘people’ rating to that fund to begin with." 

Like Tsakiris and Gauthier, Tam tracks any incoming manager, which might translate into a “yea” or a “nay”, depending on that manager’s history. Also, “it’s worthwhile to keep track of a fund’s ability to adhere to its stated mandate, regardless of who manages it, Tam adds. Adherence to the mandate will affect an investor’s return and risk profile, especially if they’re using a fund as a component inside a larger asset allocation plan.”