Holly Cook: If you invest in funds, when your fund manager leaves it can raise your anxiety levels. Joining me today is Oli Kettlewell, a fund analyst with Morningstar OBSR, to talk through how to assess a fund manager departure. Oli, thanks very much for joining me.
Oli Kettlewell: Thanks for having me.
Cook: So when a fund loses its manager, Morningstar analysts put their rating under review. What does it actually mean? Why do they do that?
Kettlewell: Well, in the majority of cases, when a fund manager leaves, we put a fund under review, and that’s because there’s an element of uncertainty surrounding our rating. For example, perhaps there’s an interim manager that comes in and replaces departing manager, if we think about Schroder UK as a recent example. Or perhaps there’s a completely new manager who comes in from a different firm, who perhaps we don’t know and perhaps the managers themselves doesn’t know the new fund they’re going into, doesn’t know the analysts setup, and that takes time to perhaps understand how that all will come together. So, yeah, there’s an element of uncertainty there, which we would rather kind of understand before we move forward.
Cook: So from the investors’ point of view, does that rating going under review, is that necessarily a cause for concern?
Kettlewell: Not necessarily. If I think about all the times we’ve put a fund under review, sometimes we drop the fund from under review to neutral, but there are other times where we reinstate a positive rating, i.e., a Bronze, Silver or Gold. Again, a good recent example would be M&G Global Emerging Markets, which at the end of April went from under review back up to its Bronze rating. So, yeah, it can go either way from under review.
Cook: Okay. So are there any examples where you wouldn’t necessarily put a fund under review when the manager leaves? You might just leave it as it is.
Kettlewell: Yeah, I think, perhaps the best example would be if the kind of analyst within the former fund manager’s team was then promoted to the manager, we could perhaps be less likely to put the fund under review. So, for example, if this analyst had been known to us, if he was mentioned in the past and previous meetings that we had with the previous fund manager, perhaps the analyst has been providing a lot of the ideas to the fund manager, i.e., was a senior analyst groomed for the role of becoming a fund manager, then we’d be less likely to put the fund under review. I think perhaps the only other example would be, if it’s a portfolio management team, if there’s a group of perhaps seven or eight investors and all of those investors are making the buy and sell decisions of stocks coming in and out of the portfolio, then if just one of those left, we’d be less likely to put the fund automatically under review. There’s no key man risk there.
Cook: So from the investor’s point of view, they might be familiar with the manager’s name, but they might not realise that actually it is team decisions, and therefore there’s no need to worry when the manager leaves.
Kettlewell: Yeah, it depends. Some funds have high profile managers; some funds have group of portfolio managers, exactly.
Cook: So from the investors’ point of view, if the manager of their fund leaves, what should they think about?
Kettlewell: I think, really the first thing to say is, perhaps don’t jump ship straightaway. Fund performance is unlikely to kind of fall of a cliff as soon as a fund manager leaves. I think that fund companies usually have systems in place, where they keep the mandate the same. If you bought a European equity fund and the manager leaves, it’s likely to stay a European equity fund. So you have time to kind of really decide on what your next step should be, just as we have time really to decide whether we think the new fund manager coming in is worthy of reinstating the rating.
Cook: So while the investor is, sort of, doing their due diligence, of course Morningstar analysts are doing theirs as well, and meeting with the new management to work out whether or not the rating deserves to change or not.
Kettlewell: Exactly. We usually have about two or three meetings from when a fund goes under review until we decide what we want to do with a fund, i.e., put it to neutral or reinstate it with a Bronze/Silver/Gold, yeah.
Cook: Great. Well, thanks very much for explaining that and helping investors avoid emotional decisions.
Kettlewell: Thanks for having me.
Cook: Thanks. For Morningstar, I’m Holly Cook. Thanks for watching.