When jean-marie eveillard retired in 2004 from the First Eagle Global fund, it looked like the party was over. The legendary value investor had built one of the strongest track records in the mutual fund business and the odds seemed low that a successor could keep the winning streak alive. Some investors might have been scared off by the departure of this star manager. But at least one stakeholder, Jonathan Satovsky, chief executive of the New York-based wealth management firm Satovsky Asset Management, kept the faith. The First Eagle team and the investment process, Satovsky reasoned, were up to the challenge of carrying on after Eveillard.
Staying put turned out to be a pretty good call. The First Eagle Global Fund, which Eveillard piloted to benchmark-beating results over nearly three decades, continued to perform competitively, if not spectacularly, in the first two full calendar years after its famous manager left.
But Satovsky came to a different conclusion last year when another fund he invested in saw its star manager head for the exit. Robert Gardiner, a Wasatch Funds manager with an impressive run of picking microcap stocks, decided to start his own shop, Grandeur Peak Global Advisors. This time, Satovsky decided to move assets to Gardiner's new firm, which rolled out mutual funds late last year. It's too soon to judge the success of Gardiner's second act, or the impact on the Wasatch funds he left behind. But Satovsky's analysis persuaded him to follow the manager. "I have no problem with Wasatch," he says, "but I really like the story with Robert Gardiner."
Why the difference? On the surface, there was a fair amount of common ground between the two managers. Both Eveillard and Gardiner enjoyed wide respect for their investing skills when they chose to leave their funds. But Eveillard was not the only person at First Eagle. There was a discipline and philosophy in place at the fund that transcended one man, Satovsky says. He stayed as a vote of confidence for Eveillard's team. But Gardiner, by contrast, took enough of his team with him that he persuaded Satovsky to follow.
There are no hard and fast rules for evaluating management changes, simply because every situation is different and the future's always unclear. Yet there are some basic questions to start with, Satovsky says. Investors must ask themselves why they bought a fund in the first place. Were they hooked by the investment philosophy? The discipline and structure of the fund company? Or were they captivated by the manager? If they invested mainly because of the name, and that person leaves, it's time to bolt.
Star managers certainly resonate with the investing public, but as a steward of client assets Satovsky favors a more holistic approach for selecting funds. "I've been more compelled by the process and philosophy around risk management characteristics that the underlying [fund] company exhibits-characteristics that become ingrained in management's culture," he says. If that culture walks out the door, as it seemingly did with Gardiner, an investor may reasonably follow or, if the manager isn't launching a new fund, simply pull the money out.
Before investors even put the first dollar in a fund, they should consider the ramifications if the manager leaves. When I asked financial planners and investment analysts for advice on how to analyze a fund manager's exit, almost everyone emphasized advance planning.
"Before it ever happens in the first place, we talk to funds about their succession plan," says Jim Holtzman of Legend Financial Advisors.
It's impossible to make pre-emptive decisions, but thinking through the process is time well spent. Statistically speaking, one of the funds you own or recommend will lose its manager in the not-so-distant future, Morningstar data suggests.
The average manager tenure at mutual funds generally runs three to seven years, depending on the category (see Figure 1). Real estate portfolio managers, for instance, tend to stick around for longer stretches. By contrast, the average tenure at a commodities fund is less than three years, a relatively brief affair.
There's little fallout when managers leave an index fund, of course, because they have little if any discretion over the strategies. In fact, the manager may be close to irrelevant for a well-run index portfolio. But the stakes are much higher with actively managed portfolios.
All Together Now
When a fund is piloted exclusively (or even primarily) by one person, a change at the helm may require reinventing the strategy. Some managers' methodologies are so idiosyncratic that they're difficult, if not impossible, to replicate. A famous example is Peter Lynch, who exited Fidelity Magellan in 1990 after an extraordinary 13-year run of stock picking. His strategy was a widely celebrated triumph in the mutual fund industry, but one that was hard to pin down, inspiring some to label him the "chameleon." Not surprisingly, Magellan's successors have struggled to match his record. It's debatable whether the fund's rocky post-Lynch era in the past two decades is a reflection of bloated assets or the loss of Lynch's golden touch. Perhaps a bit of both. In any case, the fund's investment style within the large-cap space has evolved since he stepped down, and not always in shareholders' favor.
To minimize the risk when their managers leave (and keep clients from migrating, too), investment companies have become fond of teams. More than 70% of U.S. equity mutual funds were team-managed in 2010, up from roughly one-third in 1992 (according to an April 2012 working paper, To Group or Not to Group? Evidence from Mutual Funds, by McGill University's Saurin Patel and Sergei Sarkissian). The rising preference for team-managed strategies may be linked to Morningstar's ranking of portfolios according to style-small-cap versus large-cap equities, for instance. More advisors and investors are opting for greater control over asset allocation by selecting funds that track specific style betas.
Those trends spell waning tolerance for opportunistic strategies run by managers free to migrate across investment styles at a whim. Team products, such as those at American Funds or Primecap Management, where multiple managers each run a small portion of a fund's assets, show more consistency and stability, says Russ Kinnel, Morningstar's director of mutual fund research.
Whatever the motivation, the shift toward team-managed funds has implications for risk and return. Some researchers say team-managed funds are less likely to pursue extreme investment strategies than portfolios headed (or dominated) by one manager. In that case, it's reasonable to expect that single-manager funds are more likely to exhibit relatively extreme behavior. In fact, that's the message in one recent study of equity mutual funds (Is a Team Different From The Sum Of Its Parts? Evidence From Mutual Fund Managers, by Michaela Bar, Alexander Kempf and Stefan Ruenzi in the Review of Finance, April 2011). The authors have discovered that single managers tend to show up in the top or bottom of performance rankings (see Figure 2). And team-managed strategies are more likely to show up in the middle of performance percentiles.
Single-manager funds may not be a growth industry, but tenure is still a relevant factor if you're choosing portfolios under the influence of one name. A 1996 analysis in the Financial Services Review by Joseph Golec noted that "the most significant predictor of performance is the length of time a manager has managed his or her fund." A paper by Qiang Bu in the Journal of Index Investing reaffirms the point, concluding that "experience matters in improving fund performance, especially when the market is volatile." (Bu's paper is called, "Exposing Management Characteristics in Mutual Fund Performance," Spring 2012).