What should investors do when a star fund manager exits?
4 min read.Updated: 02 Dec 2019, 06:20 AM ISTRenu Yadav
The mutual fund industry has seen many fund manager exits in the last few years. The exit of a fund manager is an event that investors can’t ignore. Renu Yadav spoke to experts to find out what the best way for investors to handle a manager’s exit is
The mutual fund industry has seen many fund manager exits in the last few years. Somendra Nath Lahiri, the chief investment officer of L&T Asset Management Co., is the latest in the list; he put in his papers in mid-November. At the fund house, Lahiri was managing nine schemes with assets under management of around ₹30,000 crore. Usually, the exit of a fund manager is an event that investors can’t ignore. In the past, funds with consistent good performance have been seen to languish after a fund manager’s exit. Renu Yadav spoke to experts to find out what the best way for investors to handle a manager’s exit is
We put fund on watchlist after a fund manager’s exit
A car owner once called in a specialist to fix the engine. The specialist tapped the engine with a hammer once, and it started purring smoothly. “That will be ₹10,000," said the specialist. The owner found the charges outrageous as the specialist only tapped the engine. The specialist explained, “ ₹100 for tapping, ₹9,900 for knowing where to tap."
It is hard to put a value to skills, knowledge and experience. Fund managers become superstars due to a track record that spans many years and market cycles, in an intensely competitive environment. A star fund manager’s departure does pose important questions to investors and advisers.
Mutual funds dedicate much time and effort to de-risk themselves from such departures. They strive to move to a model where a scheme’s performance can be attributed to a team of analysts, a rigorous and repeatable investment process, and a strict risk management framework, besides the talents of the fund manager. Yet, when a star fund manager departs, we put the fund on a watchlist, until the robustness of the above model is proven.
Vidya Bala, Head of research and co-founder, PrimeInvestor.in
Stop your SIPs if MF scheme underperforms for 3-4 quarters
When a fund is driven more by the fund manager than by an established internal process, there can be an impact of exit. We have seen this in the past two decades with fund managers like Sandip Sabharwal, Pankaj Murarka, Satish Ramanathan and Kenneth Andrade.
Having said that, exiting from a fund is not immediately warranted. A fund’s performance cannot be gauged in the short term merely on account of the manager’s exit. Over the past five to eight years, fund houses have slowly recognized the need to be more process-driven.
If a fund underperforms and there has also been a fund management change in the past six months to a year, start keeping a close watch on performance and stop SIPs if underperformance continues for three-four quarters. Further underperformance would call for checking with the adviser or doing own research to understand what went wrong. Only then should you exit. Investors should be careful not to attribute broad market underperformance to fund underperformance. Comparison with benchmark and peers is important.
Kaustubh Belapurkar, Director , Fund research, Morningstar
Find out if new manager will follow same investing style
Afund manager change definitely warrants a review. For starters, it is important to ascertain the skill-set and experience of the manager who is taking over. It is also important to understand the new manager’s investment style and the manner in which he intends to manage the portfolio going forward.
There is no taking away the importance of a fund manager but if there is a well-established investment process or framework and also the presence of other senior managers within the team, the disruption caused by a fund manager leaving can be mitigated to a reasonable extent. There have been instances in the past where a fund was running a manager-centric strategy, and when the manager quit, the new manager couldn’t run the fund in a similar fashion, impacting the overall strategy and returns of the fund.
However, there is no need to panic and redeem immediately in case of a manager change; a portfolio doesn’t change overnight. It is imperative that investors consult their advisers, evaluate the impact of the change along with the suitability of the fund in their portfolios before making a decision.
Nimesh Shah, Managing director and CEO, ICICI Prudential Asset Management
If a fund house has robust systems, exit doesn’t matter
A fund manager’s exit should not necessarily warrant a fund review or exit. For instance, there are fund houses that are well-established brands and have a solid track record of delivering good investment performance over market cycles.
These brands have adequate internal talent pools along with the ability to attract more such talent. They follow robust research, investment and risk management processes and have clearly defined investment philosophy.
It may be acknowledged that fund management is not an individual task. The outcome is through the collective effort of various teams (research, analysts, risk managers, compliance) to deliver investment performance. The ecosystem which supports this, including the culture of the company and the chief investment officer’s supervision, also add to the investment outcome.
Hence, any exit should not trigger panic among investors. However, if there is doubt on the above factors, then they should consult their adviser so that they can take better decisions towards the achievement of their financial goals.