Are Fund Company Layoffs a Reason to Worry?

Running a mutual fund can make you rich. Fund managers can earn millions, and those assisting them typically aren't hurting either. Unless they get laid off, that is. And lately it's layoffs that have been making the news.

In recent weeks a number of mutual fund companies have announced plans to let people go. Ariel, a small shop, was one of the first to announce cuts. Fidelity's two waves of reductions will cut loose 3,000 employees. BlackRock has shed personnel, as well. Others have made similar announcements, and there's almost certainly more to come.

For shareholders of funds run by these companies, these announcements can be confusing or disconcerting. Are they firing all the managers? Who's going to pick the stocks? Or is this all back-office shuffling unrelated to the funds themselves?

First, Don't Panic
The first thing to do is put these numbers in perspective. Fidelity is a vast financial conglomerate. The retail mutual fund operation is just one part. Even that piece is divided into the front-line investment-management people--the fund managers named in each fund's prospectus and the analysts who work for them--and those who do the less-noticed work in accounting, legal, marketing, and the call centers, among other areas. Most--in some cases, nearly all--of the departures announced in these fund company layoffs have come from these other departments, not from the investment-management personnel most critical to your fund's performance.

That's no consolation for those let go. In fact, in human terms, it's more damaging; a laid-off call-center employee doesn't have the multimillion-dollar nest egg possessed by many a fund manager. But for a fund shareholder, back-office layoffs likely will have little impact on fund performance, though it could take longer to reach a phone representative with a tax question. (Just to be clear, I'm leaving aside the much different question of what these staff reductions mean for shareholders of the investment-management corporation itself.)

What if investment personnel are included in the layoffs, though, as has happened most recently? In those cases, it pays to look at the specifics. There still may be no cause for concern. But in some instances the actions might point to short-sighted planning by fund firms that could hurt them in the long run.

Leave Your Laptop at the Door
One of the most sweeping fund manager layoffs took place at Putnam last week. There, 12 managers were sent packing at the same time. That would seem to indicate that the market crunch is having serious effects. However, in this case, something else is up. Putnam has a new CEO, Robert Reynolds, who by all appearances is trying to make Putnam look as much as possible like his old employer, Fidelity. In an effort to improve performance, Putnam's previous leaders had matched up managers who use quantitative strategies with counterparts who rely on fundamental analysis, and also had expanded the size of the teams managing the funds. Well, Fidelity doesn't have big teams running funds and doesn't pair quants with fundamental managers, so the new Putnam won't, either. The 12 managers who had to turn in their Blackberrys last week were mostly quants whose services were no longer needed under the Reynolds regime.

In short, those layoffs were driven by the new direction being steered by a new CEO, not by the recent market decline. This move may help performance, or it may not, but it's not an alarming sign.

At other firms, where layoffs are more directly tied to current economic and market conditions--and the subsequent declines in fund assets and fund company revenues--most of the cuts did not at first target investment professionals. But as time passed and conditions worsened, that changed. Even in these situations, however, concern may not be warranted. Some firms might be using the dismal conditions as a convenient excuse to get rid of a few analysts and managers who weren't all that great in the first place. At others, they might be letting them go only under duress--but if the firms had sizable analyst staffs and manager ranks to begin with, the departure of a few may not have as much of an effect as one might think. After all, many topnotch funds at smaller shops, such as  UMB Scout International , have amassed outstanding records over the years with tiny investment staffs.

It Could Backfire in the Long Run
Problems could arise, though, if fund companies let go truly talented analysts and managers simply in a rush to cut costs or to impress corporate shareholders with the illusion of activity. That in and of itself could hurt fund performance. Moreover, it could cause disillusionment among other good managers and analysts at the firm, who may then start looking to leave on their own terms. (Even in tough times there are jobs available for respected managers.)

It would be far more encouraging to hear firms say they're willing to take a short-term hit to corporate earnings if that's what it takes to keep their staffs intact and content--or that they're even adding to their ranks by welcoming some of the talent being let go by rivals with less of a long-term outlook.

Unfortunately, from the outside it's not easy to know which case fits under which category. For one thing, analysts' records, unlike those of managers, aren't available to the public. So when a firm says it has let some go, we can't immediately know if those are topnotch people who will be missed, or the opposite. Therefore, it makes sense not to act rashly and immediately sell when you hear announcements of fund company layoffs, even when they do include investment personnel.

But do keep an eye on this trend. Declining revenues will force many firms to make tough decisions. Over time, it should become clear which firms have achieved short-term savings at the cost of long-term gains, and which have acted prudently and with vision.