When your fund manager leaves

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.

It’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.

Here’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 it’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: Don’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.

7 comments

  1. CD

    Jun 27 2007

    The departure of Allan Jacobs is a very disappointing and traumatic event for unit holders. I’ve been a unit holder since 1995 (the unit price was then $21.05, now it’s $132.21) so I’ve been well rewarded over time.

    But I just want to comment on the statement in your column by Sceptre CEO Richard Knowles. I’ve been purchasing mutual funds for 25 years, but I’ve never received a request to approve an increase in the management fees — that is, until Sceptre requested such an increase a couple of years ago.

    From my standpoint, I voted against the increase because Sceptre gave no reason or purpose for the request other than to increase research (as I recall). Adding research, to me, implies adding analysts, not increasing compensation to the manager.

    But today, Mr. Knowles seems to be implying that the requested fee increase was to further compensate the fund’s manager. If this was the case, they should have stated it as such, because I think any long-term unit holder would have been more receptive to fee increase that directly compensates a manager (as opposed to a fund company) for superior performance.

    Mr. Knowles declines to acknowledge the fund’s asset growth over the years. In the 12 years I’ve owned the fund, the asset base has grown at least fivefold.

    When the CEO attempts to link a failed management fee increase to a fund manager’s departure, he’s really attempting to blame the unit holders for the manager’s departure. I question the leadership of Mr. Knowles.

  2. FourPillars

    Jun 27 2007

    I think Knowles was also trying to blame Jacobs for asking for more money….or at least let everyone know that’s the reason he left.

    Mike

  3. Canadian Capitalist

    Jun 28 2007

    I think we should demand that mutual funds waive or refund the sales charges when a star manager leaves. Can you imagine buying tickets to see a popular band only to see it replaced by a local outfit? People would scream for their money back.

    Of course, this doesn’t solve the problem of a capital gains hit if you sell a fund to buy another one.

  4. Brian Poncelet

    Jun 28 2007

    Hello Ellen,

    Your last paragraph is right on the money,…”don’t rush into it”. “Take time to let things settle down”. Most good advisors I believe will say the same thing.

    Hopefully, the reason someone has a good financial planner, is to make sure their financial plan is on track. Not to sell a new mutual fund from old money from their investments! It has to be in the best interest of the client. If the client makes money and is not taking on more risk, and is aware of all fees or taxes, this is good for the financial planner too!

    Brian Poncelet, CFP

  5. Ellen Roseman

    Jun 30 2007

    Good discussion about the stay-or-follow Jacobs quandary at Financial Webring discussion forum, http://www.financialwebring.com/forum/viewtopic.php?t=105451&sid=ed2f9efa1e1fa7095e234b936441d22a.

    Many think his strong record will walk out the door with him and it’s time to look for another smalll cap fund (one that isn’t closed to new investors).

  6. Brian Poncelet

    Jul 25 2007

    Hi Ellen, I came across a couple of ideas I would like to share with your readers about “when your fund manager leaves.”

    Jordan Benincasa from Morningstar wrote a good story about just this subject. He points out two main ideas:

    1. What is the new manager’s track record?
    2. There’s is no “I” in team. A fund that is team-based or has a number of managers on board is much less vulnerable to employee turnover than one that is run exclusively by one individual.

    Hope this helps,

    Brian Poncelet, CFP

  7. Bob Hrabovszky

    Apr 19 2008

    I am a wholesaler for John Hancock Funds. Advising FA’s on these things is my business. I dispute the statement that :
    “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.”
    The vast majority of mutual funds are sold in fee based accounts with no sales charge. Yes, any sale will trigger a capital gain if they made $$ in a non Qualified account but that must be paid at some point anyway.
    Most of the rest of fund sales are c shares which have usually a 1%, 1 year cdsc. So if the hold period is over a year they redeem for free.
    What most research indicates is that if the fund management team lost a lead mgr. or 1 key manager they will usually continue to do well if the rest of the team stays. The deepness of the team and the relationship with the old mgr. for stock picks is also key. (no fund mgr. co. will admit this though).
    It is when there are several defections from a management team that most funds tend to crater. Studies from morningstar show that top perfoming funds that lose managers and keep the majority of the team intact usually continue to be top performers. Fund co’s do not want to risk burning investor with their top performers with the most assets.