In Morningstar’s latest research, we studied two questions about fund management change. First, does it affect investor outcomes? Second, how do investors react to it? What we found was a behavioral gap among investors.
Fund management change does not affect performance, on average
The United States mutual fund industry handles management changes quite well. Most often, fund manager changes appear to be planned and thought out in advance. Fund companies have succession planning, where research analysts are groomed to eventually take over as portfolio managers. Fund companies have robust research and risk teams, so when there is a manager change, the new manager is still using the fund company’s analysis. Fund companies also set narrow mandates for funds. And there’s a stated objective with a restrictive range of capital deployment by which managers must abide.
Given all of this, we find performance continuity among funds, regardless of who is noted at the top.
Investors react negatively to fund management changes
They move money from the funds with new leadership to funds where they know the management team. They do this despite evidence that changes at the top of funds don’t affect performance. There is no discernable increase or decrease in gross excess returns given a leadership change. Investors—whether that is an advisor, wealth manager, or individual—want to appear to be in control. They want to believe they are adding value. So a new unknown, such as a management change, can prompt some investors to take action. They are comfortable with the team that they originally invested in. And when this team changes, they express concerns and exit the fund.
4 ways investors should react to fund manager changes
- Think twice about acting on a management change. Investors need to ask themselves whether the fund is truly an outlier. Is it one of the few funds where the strategy and manager are outside the norm? Is it truly run by a personality or highly specialized individual at the top, where the range of his or her deployment cannot be stated in an investment process or replicated by anyone else? In most cases, the answer will be no.
- Consider the type of account holding the fund. Investors should know whether the fund is a taxable account. If so, do the tax consequences justify moving to a comparable fund? The investor is better off waiting out the management change if the rest of the fundamentals still hold. Otherwise, the investor will incur an unnecessary tax bill.
- Check the bill. Have the fund expenses changed? If a fund's expenses go up, then moving to a cheaper option, net the incoming tax bill, may be justified. If the expenses do not change, then investors should think long and hard about selling out of the fund. As we all know, the only certainties of investing are costs.
- No action could be the best action. Our study shows that investors do not need to be skeptical of every management change, especially if they feel confident in the fund company, the fund's process, and the fund cost. Sometimes, the best action is no action.