June 27 2007 by Ellen Roseman
You own a mutual fund that has been a hot performer. Then you hear some bad news. The manager is leaving, going to another firm.
Itâ€™s a common scenario on Bay St., where top-performing fund managers often get snapped up by the competition. The latest defector is Allan Jacobs of Sceptre Investment Counsel. His small cap fund had 20 per cent annual returns since he took it over in 1993.
When your fund manager looks for a change in scenery, you have to make a big decision: Do you stay or do you follow? In the short term, you should stay. Don’t rush out the door, but sit back and watch for a while.
Switching usually costs you money. You may have deferred sales charges to pay on the old fund, as well as sales charges on the new fund. And if the fund is not held in your RRSP, you may have to pay capital gains tax when you redeem.
If you bought the fund through a financial adviser, ask for help in assessing the change. But remember that advisers make more money if you switch than if you stay. That’s because they get big up-front commissions paid by fund companies on deferred sales charge funds (and ultimately financed by investors through management fees). So, your adviser has a hidden incentive to recommend a move.
Hereâ€™s what you need to know when a fund manager leaves. Who are the replacements? Do they have the same investment style and a track record of working together with the outgoing manager? Do they plan to shake up the portfolio or leave it the same?
If itâ€™s clear that new managers are making significant changes to the portfolio, you might want to sell. Getting rid of stocks picked by the old manager is costly. All unitholders, including you, will have to absorb the transition costs.
Should you buy the old manager’s new fund at a new company? My advice: Donâ€™t rush into it. Take time to let things settle down. Wait for the manager to do all the road shows and media interviews. There will be transition costs here, too. Let someone else pay them.