What should you do when a star manager leaves a fund?

Over the decades, successful investment managers often attract plenty of followers and celebrity status, with Terry Smith and Nick Train arguably the biggest household names at present.

However, this poses a problem: what should an investor do when a star manager leaves, or decides to hang up his or her boots?

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Last month, two longstanding fund managers, Bruce Stout of Murray International (LSE:MYI), and John Bennett, who oversees several European funds for Janus Henderson, announced plans to retire from running money. They will retire next summer, in June and August respectively.

Their announcements followed that of UK equity fund manager Richard Buxton, who said in June that he would be retiring. In this instance, the handover process is shorter, with Buxton stepping down at the end of this summer. 

Over the past couple of years, high-profile retirements include Simon Knott and Hideo Shiozumi, while Scottish Mortgage’s longstanding fund manager James Anderson retired at the end of last April. News of his departure was flagged more than a year in advance.

• Murray International’s Bruce Stout to retire in June 2024
• Richard Buxton to retire after 40-year career

History shows that a change in a fund or trust’s lead manager can have a big impact, and that it can be for better or for worse, so investors should always take note.

Here are some top tips on how to decide whether to hold or fold.

Style guide

A fund's style should have a big influence on whether an investor holds or folds. In his book How to Pick a Good Fund Manager, John Chatfeild-Roberts, head of strategy for independent funds at Jupiter, writes: “Some firms have a regimented style of managing money, allowing little room for managers to demonstrate their flair. Others allow talented individuals the freedom to perform.”

Key-person risk is therefore important to assess. Has one fund manager been highly influential in calling all the shots, or has it been more of a team approach, with a couple of named co-managers or deputy fund managers? If it’s the former, then a fund manager leaving for another fund firm or retiring, is arguably more of a blow.

Will the way the fund invests change?

Another important thing to consider is whether the new fund manager is going to stick to the current investment process or make changes. In most cases, the investment process will remain the same. But if that isn’t the case, then it’s no longer the same fund as when you bought it, so it could be time to move on.

A fund changing its investment approach is not necessarily a bad move. There will be a reason for the change, and it could lead to improved performance.

But if a fund is no longer doing what you want it to do, it is probably time to hit the sell button. For example, if you bought it for income purposes and it is no longer paying dividends.

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Succession planning

In the event of a fund manager retiring, consider how long the succession planning has been in place. Has the new fund manager been a co-manager or a deputy fund manager for a number of years, or have they been drafted in relatively recently?

Investors will want the handover of how the fund or trust is managed to be smooth.

The main difference between a retirement and a fund manager exit is that the fund firm will generally have more time to prepare for the former scenario.  

Why is the fund manager leaving?

When a fund manager leaves for a rival, a key question to ask is: why?

Some fund managers depart big fund firms for a boutique, so they can be a bigger fish in a smaller pond.

Backing a boutique has the advantage of the fund manager’s interests usually being more directly aligned with fund performance. This is due to the fact that he or she typically has a bigger stake in the overall business.

Another potential benefit is that boutiques usually have more independence in the way they manage assets. In contrast, in larger management groups there can be pressure to toe a corporate line.

Of course, greater freedom is not always healthy. Particularly if there is a lack of oversight in how the fund manager invests and if the manager is not being challenged appropriately.

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Is the entire team jumping ship?

Sometimes whole teams are poached by other investment firms. This is arguably a sign to sell, as a lot of the expertise will have to be built from scratch.

Recent examples include BNY Mellon Global Income manager Nick Clay moving his team to Redwheel in 2020, and JO Hambro hiring Hermes’ impact investment team, in 2019, led by Tim Crockford.

In addition, the culture that’s been built up by the team will also depart with them.

‘If something major changes, we sell’

For some, a change in management is a strong reason to sell. According to Rob Burdett, joint head of multi-manager at Columbia Threadneedle, the default position of his fund of funds is to sell out when a manager leaves. “We sell if something major has changed. That sounds a bit brutal, but adopting a wait-and-see approach would not be the most prudent thing to do.”

Burdett advocates considering from the outset whether there is any reason not to sell and switch to a fund that isn’t tainted by change. He argues that not selling carries a potential opportunity cost, and that manager change involves risk.

It is important to note though that, as a multi-manager, Burdett will pay lower fees when buying in and out of funds. Private investors need to be more cautious about trading fees racking up.

Should you stay or should you go?

As a rough rule of thumb, the following guidelines may help you make your decision.

Stay with the fund if:

• The manager is retiring and there has been good succession planning

• The departing manager and the new one have worked together in a transition period

• The manager was a team player and the team has remained in place

Follow the manager if:

• The manager is a solo star operator

• The whole team is going with the departing manager

• The new fund is a strong match for your needs

Seek pastures new if:

• The incoming manager appears to be making major portfolio changes

• The incoming manager is an unknown quantity

• The investment approach of the fund has changed and no longer meets your needs

And remember…

It is important to bear in mind, as the fund management industry so often warns, that past performance is no guide to future performance. While there are some really good active fund managers, the reality is that not even the best fund managers are immune to a change in fortune.