For newbie investors, the biggest nightmare would be a market crash after they have started investing. And, the next big worry would be if the fund manager changes. Its very natural to worry when a fund manager changes for a fund after you have invested upon performing due diligence and understanding the style of investing. It’s very heartbreaking to know the manager is leaving when the fund is actually performing well and is making good money.
Job hopping is very common in any industry, and so in the Mutual Fund industry as well. Every year many fund managers get promoted or move to other organizations. Does that mean you should also exit the funds and start chasing the fund manager? Thankfully, the answer is NO.
Exit or Promotion?
Check if the fund manager is promoted within the same organization or has shifted to a new fund house. In the former, you do not have to worry much, as he’ll be still overseeing the investment process of the fund. However, you need should evaluate the past track record of the new fund manager.
Few fund houses have two fund managers managing one fund, this is a good strategy as it helps in succession planning. In case, one quits there is always the other fund manager who is capable of keeping the fund’s performance unaffected by the exit of the other.
However, if the CIO or the fund house’s best fund manager quits, it might have an impact on the fund house. Even though fund houses are process driven, end of certain long stints will have an impact on the overall investment approach.
The impact of an exit is witnessed more in case of fund categories whose investment mandates are loosely defined. For instance, ELSS or Multi-Cap funds. In the case of Large, Mid or Small-cap funds, they need to follow the categorization norms for portfolio construction, while for multi-cap funds there is a leeway given. Moreover, for other equity funds, investment approach could be tweaked from value-oriented to growth philosophy or vice-versa.
Check for any change in Investment Strategy
The investment strategy of a fund is important. Unless and until the fund’s strategy is in line with your investment goals and objectives there’s no point in investing. Therefore, any change in the strategy will have an impact on your final goal.
The best way to identify this is to look at the portfolio’s turnover ratio. If you witness a significant change in the value after hiring the new fund manager, it may indicate that a good part of the existing portfolio is getting replaced. Another way to identify this is by looking at the fund’s top holdings, any significant change is a good indicator.
It is advised to monitor the fund for at least one year after a fund manager moves out. In the instance where the fund continues to perform well, there is no point in exit because the fund manager has left. Be assured that the new manager is doing well and that your investment is in good hands. Exit the fund in case you witness a significant dip in its performance.
The Fund manager is the backbone for any fund. If he changes, it definitely is an alarming indication for you to re-visit your investments. If your investment objectives are in-line with that of the fund then stay put with your investments, else, it’s advised to identify a fund that would best suit it. Always check the past record of the new fund manager before immediately jumping into conclusions. In case you are able to decide, whether to continue or exit, talk to your financial advisor and take the right step.