- The Washington Times - Tuesday, June 8, 2004

A good mutual fund manager can achieve rock star status in financial circles. Consistently high returns that manage to beat the market can propel a manager to investment fame, with cover stories in personal finance magazines and punditry opportunities on television.

So what happens when the star leaves?

Even if a given mutual fund manager isn’t in that league, his or her departure can change the strategy and philosophy of the fund’s investments. The new manager may have different ideas about how to get the best returns. Sometimes they work. Sometimes they don’t.

The vast majority of mutual fund investors don’t even know how their funds are managed, let alone who’s in charge. But management plays an important part in any mutual fund, and savvy individual investors make themselves aware of any changes.

“The individual investor is putting their trust in that fund family and in the portfolio manager in that fund family,” said Dian Vujovich, publisher of Allaboutfunds.com, a mutual fund education Web site. “It’s up to the investor to do his homework and be aware of management changes.”

There are two basic kinds of management at most mutual fund companies. Team-managed funds still have a lead manager, but decisions are made as a group, with individuals coming to consensus on strategy and investment ideas. Even when a lead manager leaves that particular fund, the team’s philosophy and strategy tend to remain constant. Most large funds are managed by teams.

Other funds are dominated by an individual — the star system. That top manager has final say over all investment strategies and activities. When such a manager is replaced, the fund’s strategy and investment philosophy can undergo a major change. Star managers tend to run smaller funds with very specific strategies and investment goals, such as a high-yield fund or a sector-specific fund.

“The difference between team-managed funds and individuals can be important,” said John Markese, president of the American Association of Individual Investors. “Figuring out how it’s managed will help you figure out what to do should that management change.”

Determining a fund’s management can be as simple as reading the latest prospectus. Most companies will tout their star managers throughout, while team-managed funds will spend less time on individual members of the team.

In addition, many bond funds, exchange-traded funds and index funds are far less dependent on the manager’s strategies and ideas, so investors who find a management change in these funds have far less to worry about, Mr. Markese said.

So what happens to a fund when the management changes? That depends on how well the fund has been performing under the old manager.

A poorly managed fund that switches leaders can be a positive for an investor because the fund company has probably replaced an ineffective manager.

But the loss of a star manager in an outperforming fund isn’t necessarily a bad thing. While some funds have difficulty in maintaining their growth after a top manager leaves, a study by fund tracker Morningstar Inc. showed that approximately half of all mutual funds maintain their performance when management changes — for better or worse.

The 10 performing funds from 1995 to 2000 continued to outperform their benchmark indexes after a management change.

The best thing an investor can do is to read the prospectus closely, and take an active interest in the fund’s performance. Many financial-tracking Web sites include news items about a particular fund, and can be helpful in learning when a fund changes managers.

“Some funds are very good at keeping investors informed about any changes,” columnist Vujovich said.

“Others will require the investor to do a lot of tedious homework. But when your money’s at stake, the homework comes in handy.”

Still, there’s no telling whether a new manager will be successful in maintaining the fund’s growth or reversing a downward trend. Likewise, it’s difficult to predict whether a star manager will be successful at managing a new fund.

“Don’t sell anything just because the manager’s gone. A lot of people sell on a knee-jerk reaction, even when a star manager leaves,” Mr. Markese said.

“First off, you have to look at why he left. And then, you have to give the new person or new team some time.”

Fund analysts said it takes about a year at minimum to determine whether a new fund manager is successful. During that time, investors should not only compare a fund with its benchmark, but also with its peer group of other funds. Even if the fund loses ground, there may be no need to get out of the fund. If its peers have likewise underperformed, there could be market forces that account for the loss.

After the first year, investors can better assess whether the new manager has done well.


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