Evaluating Changes in a Multimanager Lineup

Most investors dread the day that their fund's portfolio manager departs. The new leader may lack suitable experience, have a less impressive record, or institute an unwelcome change in strategy. For shareholders, it takes time and effort to determine whether the fund is still worth owning. If the decision is no, selling it can cause tax complications, and finding a replacement takes more time and effort.

Even if shareholders decide to hold on, they must monitor the fund more closely afterward.

However, for many funds, this scenario is outdated. Instead of having one key leader, running the fund solo or with comanagers who are subordinate, these portfolios are led by multiple managers with similar levels of responsibility. In some cases, the fund's advisor uses two or more in-house investors to run the fund as equal co-lead managers. In other cases, advisors such as Vanguard or Litman Gregory delegate the management to a number of subadvisory firms, each of which may themselves assign their slice of the portfolio to several portfolio managers rather than just one.

This phenomenon has been dubbed "the decline of the star manager," but that's misleading. Very few managers have ever been recognized widely enough by the general public to truly merit that label. A better way to describe the trend might be "the downplaying of the solo manager."

Evaluating a Departure
Investors thus can face a different and more complicated challenge when a manager departs. If the manager heading out was just one of three equal comanagers, or one of several subadvisors, it can be tough merely to assess the significance of the departure.

When there are several managers from the same shop running the fund, the advisory firm may downplay the contributions of the departed manager and highlight the importance of those who remain. Investors, advisors, and fund analysts who have followed the fund and have dealt with its managers over time can judge the departure's importance based on that past experience, but the majority of shareholders may feel frustrated, unable to determine even if their fund has experienced a meaningful manager change or not.

Fortunately, unlike a stock, the price of a diversified fund won't collapse overnight while these shareholders watch and wait. There's time to evaluate the fund's next portfolios to see if changes in the holdings may indicate a change of direction.

Returns can also help provide guidance. While one must use short-term performance with caution, in some cases that data can also indicate if the strategy has remained intact. For example, investors can see if the fund continues to perform as they would normally expect given its previous strategy combined with the conditions in the market.

In addition, investors can watch to see if other managers or analysts follow the first one out the door. If so, that may indicate that the initial move was more significant than it first appeared to be.

Meanwhile, if a fund is run by a number of different subadvisors, it's rarely worth dumping a fund just because one of them changes. However, even this depends on the situation. If the departing manager was the one who attracted you to the fund, and had control of a substantial portion of assets, that might justify a serious reconsideration, especially if you've been wavering on the fund for other reasons.

More important, shareholders of a fund that uses multiple subadvisors should have confidence in the overall advisor that is choosing and overseeing the subadvisor lineup. That way, it's much easier to remain calm when a change occurs; one can feel comfortable that a suitable replacement will be found. Conversely, if the specific identities of the subadvisors drew you to the fund in the first place, and you were never all that impressed with the shop overseeing the fund, changes in that lineup could justify selling it.

Other Ways to Adapt
Of course, investors have ways to avoid the issue entirely. They can choose passive vehicles designed to match benchmarks, where individual managers play a less critical role and strategies almost certainly won't change if one of them leaves. Conversely, investors can go in the opposite direction and choose funds run by a sole manager (or one with clear leadership even if he or she has comanagers). That manager's departure would raise immediate questions, but at least such questions would be clear-cut. And if the fund is held in a tax-sheltered account, replacing it would not have tax consequences.

To be clear, there's nothing wrong with owning a fund run by a number of managers, whether they're a team from the same firm or represent many different subadvisors. Some excellent funds use these management structures. In fact, some investors will see this as their preferred approach; it's a way to get active management without the potential disruption caused by a manager change at a solo-manager fund.

Regardless of the structure, investors should be looking for the same basic strengths when choosing a fund, while keeping in mind that multimanager funds must be evaluated slightly differently than those that have one clear leader in charge.