Are Fund Managers Signaling Their Departures?

Over the past year, mutual funds have begun reporting to the SEC how much portfolio managers invest in the funds they run. This information is like gold in that it can signal a manager's commitment to his or her fund.

Recently we've noticed some signs of just how useful this information can be. I hesitate to call it a trend yet, but there are signs that some managers who have surprisingly small amounts invested in their fund may be more likely to retire or leave for another firm. Thus, the information could help tip you off to the fact that a manager might not be committed to a fund for the long haul.

To be clear, low manager ownership won't always help you anticipate a change at the helm. Moreover, these figures only have to be updated yearly, so the information can get a little stale. Finally, there's the obvious point that the manager has to know they're leaving for this to work as a signal. If they get fired or receive a strong hint that they ought to explore other employment options, they'll probably take off pretty quickly before any signal can make it into the SEC filings on manager ownership.

Those caveats aside, we have seen some cases where managers have surprisingly little invested in their funds, and then they leave. Because we have only one year's worth of ownership information, we can't be sure if the lack of ownership of these departing managers is because they have pared their holdings or simply never invested much in their funds to begin with.

For example, Neal Miller announced his retirement from  Fidelity New Millennium (FMILX) last week. But maybe we should have seen it coming in late January, when a new filing revealed he had a shockingly small investment in the fund considering his 13-year tenure there. The filing showed that at the end of November 2005 Miller had just $10,000 to $50,000 in his fund.

In addition, a filing from May 2005 may have been a hint that Bob Stansky was considering retiring. He had between $500,000 and $1 million in  Fidelity Magellan (FMAGX) at the end of March 2005, and he announced his retirement in the third quarter 2005. While that sum would seem like a lot if the fund were a niche investment or run by a young manager, it was surprisingly small given that this is a core fund and Stansky was a long-tenured and well compensated senior manager.

At  John Hancock Technology , manager Anurag Pandit owned a mere $10,000 to $50,000 in the fund at the end of October 2005. Hancock announced a manager change at the fund last week.

Also telling was the fact that in October 2005, Rick Mace of Fidelity didn't have any money in his longtime charges  Fidelity Overseas (FOSFX) and  Fidelity Worldwide (FWWFX), but had $50,000 to $100,000 in  Fidelity Aggressive International (FIVFX), where he had taken over only one month prior. As we learned in December, it turned out that Mace was stepping down from Overseas and Worldwide, but planned to return to Aggressive International. Of course, with hindsight those investment levels make perfect sense, since any good manager would want to invest in funds that they manage. I should note, however, that the filing with this information came out on Dec. 29, 2005, shortly after Mace's departure was announced. So, it wasn't necessarily a predictor of Mace's eventual change in roles, but it does bolster my idea that managers with surprisingly low investments in their funds may be preparing to leave.

I should emphasize that the level of "surprise" contained in the ownership data is crucial to what potentially says about the level of manager commitment. For example, it wouldn't be a big surprise to find out that a New-York based manager has nothing invested in his California muni fund, so it clearly can't be taken as a signal that he might be leaving. One reason the lower ownership stakes of the Fidelity managers mentioned above stick out is that many of their colleagues at the firm, such as Will Danoff, Rich Fentin, and John McDowell, have more than $1 million in their funds. Experienced managers at Fidelity typically eat their own cooking.

Of course, we've also seen the opposite hold true--managers with heavy investments in their own funds leave or retire. Blaine Rollins had more than $1 million in  Janus Fund  as of the most recent filing before he was moved to the smaller Janus Triton (JATTX). Likewise, Bill Miller had more than $1 million in  Legg Mason Special Investment  (LMASX) in May 2005, and he stepped down from that fund at year-end.

It will be a while before we know if this is simply anecdotal evidence that will be outweighed when we have more complete data. Likewise, we won't be able to know for sure what manager selling (or buying) really signals until we get a second set of yearly statements reporting on manager investment. Meanwhile, it bears watching.