When a manager leaves

There has been a flurry of resignations and poachings within the funds management industry in recent times. Spiralling salary expectations, teams leaving en masse and high profile fund manager walkouts have dominated the finance pages in recent months, and left many advisers and investors wondering what to do with their investments.

The lesson out of this is: don’t pin the hopes of the whole portfolio on the talents of just one manager. One of the most valuable benefits that the multi-manager process brings for investors is mitigating the risks associated with ‘star’ managers leaving.

Over the years, we’ve learned that there are several things to consider when a star staff member leaves an investment manager:

1. Was the star truly the one generating the returns? In many cases, the star is backed by a legion of talented but anonymous analysts who provide the bulk of the insights— and may very well continue to do so even after the star’s departure. The most important thing for you to remember is that a portfolio manager’s departure does not warrant a snap decision one way or another.

The most effective response will come with a combination of research, perspective and time.

2. Does the fund’s performance reflect mostly the departing star’s individual brilliance or the fund’s investment process? Often the fund’s investment process is what really adds the value, and can continue to yield good results long after a star leaves.

3. What caused the departure? Was it an isolated case or part of a pattern? Even stars lose motivation, have personality clashes, seek new challenges — that’s just human nature. But if the departure heralds a spate of further departures, or comes on the end of previous departures, there may be a more endemic problem. Given that the successor will likely face the same problems, it makes a lot of sense to consider taking your money elsewhere.

4. Who will replace the departing manager and what do you know about the replacement? Many firms groom successors to their star managers. If the replacement comes from within the organisation, there is a better chance that the fund’s investment process will not change dramatically after the star departs.

5. What changes is the new manager planning, if any? A manager can have a lingering impact on a portfolio long after his or her departure, especially if the successor is slow to make significant changes to the portfolio.

6. How costly will it be to move your clients’ money elsewhere? Will your clients be selling their shares at a loss? Will they face heavy capital-gains taxes? Keep in mind that as an adviser, you also take the risk of your clients’ investments being “out of the market” while you make the transition from one fund to another. Consider whether the potential benefits outweigh the costs.

7. Have you considered all the implications of the shift? A manager’s departure doesn’t necessarily mean a fund’s performance will go into a decline. Russell’s research in markets around the world has found that there is no hard-and-fast rule when it comes to manager transitions: sometimes a fund’s performance does indeed decline following the departure of a star manager, but sometimes it remains consistent— or even improves.

8. Does the successor’s philosophy or style suit your client’s objectives? He or she may trade much more actively or shift the fund’s focus. Investors can watch for significant changes in fund holdings or portfolio turnover rates, but changes like this can be difficult to monitor. Some investors may simply need other investment alternatives.

9. Is the departing manager just one among several in your portfolio? We encourage all of our clients to diversify their assets among different managers and investment firms to help reduce the risk of any one manager leaving. This is a key tenet of multi-manager investment.

10. Are you thinking about the shift in the bigger context of your clients’ portfolios? Sell discipline is often the factor that separates average investors from truly successful ones. Many people can recognise a good buy when they see it. But few know when to sell — and that includes fund investors. For your sell discipline to be effective, you must maintain perspective when one of your fund managers leaves.

Overall, investors need to be aware that with investment markets performing as strongly as they are, fund managers will invariably move around to take advantage of new opportunities. What this means is a heightened level of risk for the investor if they are not adequately diversified or one inclined to chase returns. Using the multi-manager process helps mitigate this issue and keeps your clients focused on the longer-term.

When discussing investment decisions with your clients, it is important to consider these and other types of risks, rather than just looking for great returns.

However, the most important thing for you to remember is that a portfolio manager’s departure does not warrant a snap decision one way or another. The most effective response will come with a combination of research, perspective and time.

Chris Corneil is the managing director of retail investor services at Russell .