When the Manager Takes a Hike
A word to the wise: Don't get overwrought about who's managing your mutual fund. That marquee name who did so well last year will probably jump to some fancy hedge fund before you know it. And the one who rode the market to the bottom could be sent packing, too.
It used to be that mutual-fund investors saw a favored manager's departure as the end of the fund's magic. But changes at the nation's largest fund companies are now routine, says William Dougherty of Kanon Bloch Carré, a Boston investment adviser. "They don't like to have any stars to shine or control the image of the fund," he says. "There's tremendous control on these people to just manage the assets and stick to the fund's mandate."
Sometimes, the arrival of new talent can look like a buying opportunity, as the Pioneer Value Fund does now. In Richard E. Dahlberg's nearly three years at the wheel, the fund's performance was mediocre. When he left in November, 2001, to join Grantham, Mayo, Van Otterloo & Co., Pioneer parachuted in one of its successful team leaders, John Carey, who has run the firm's flagship large-cap blend Pioneer Fund since 1986--boasting 10-year annualized returns of 13.7%.
Rather than jump ship at the first dip, give the new helmsman some slack to prove his or her abilities. For one thing, an overhasty departure could lead not only to regrets if the new team finds its footing but also an unnecessary tax hit from the sale of a long-term holding.
It's worth sticking around for up to a year, "unless things turn really horrendous," says Peter Di Teresa, a senior analyst at Morningstar Inc. "But I'd keep pretty close tabs on [the fund]."
Prospects are usually worse if the departing manager was a solo act rather than part of a team. Peter Lynch, the legendary manager of Fidelity Investment's Magellan Fund, was a hard act to follow, as would be William H. Miller III if he chose to leave the A-rated Legg Mason Equity Trust Value fund. That's why many fund companies now use teams to try to ensure an orderly succession of people with the same investing philosophy.
Franklin Resources' Mutual Series Funds, for instance, were all the rage when veteran manager Michael Price ran them. He sold the funds to Franklin in November, 1996, and left active management in October, 1998. Investors' fears were assuaged when Price's protégés took the reins and continued to do well--four of six make this year's A list. Last September, when three more of the original staffers left, investors had the same concerns. Mutual Series promoted analysts and hired replacement managers, while veteran managers Jeff Diamond, David Winters, and Susan Potto have stuck around.
But even with a carefully planned succession, there can be weak transitions: Erin Sullivan, the former manager of Fidelity's Aggressive Growth Fund, left to start her own hedge fund after earning triple-digit returns in 1999. Under successor Robert C. Bertelson, the fund posted a 47% loss in 2001, making it one of the worst in its class--97% did better.
This issue of the annual BusinessWeek Scoreboard flags recent manager changes. If the manager of your mutual fund has left, don't lose your cool. Just put the fund on a watch list. Compare its performance with other prospects' in its category as the year progresses. Look at it this way: You don't have to wait for your fund company to act if your fund's new manager isn't doing well. You can fire that manager and hire another one.
By Mara Der Hovanesian in New York