The risk of manager turnover
If your manager leaves, should you?
How many times have you invested in a mutual fund only to find the manager, whose approach wooed you in, to move onto another business opportunity? All too often probably. Worse, you might feel tied down by an unrealized increase in value (which would become taxable if you sold) or contingent exit fees. Manager turnover (i.e. manager changes) can happen as a result of poor performance or if the manager is attracted by other business endeavours. Whatever the case, there are a few things you can check to determine if your fund company has what it takes to keep its talent.
Companies that have difficulty retaining their most talented people usually have something amiss at the route of the organization and its structure. That being the case, you probably wouldn't want to invest in such an organization. So is the case with mutual funds. Some funds and companies simply can't hang onto their most valuable asset - money managers. Since managers are entrepreneurial by nature, a lifetime commitment is unrealistic - so here's a rule of thumb:
steer clear of fund companies that can't hold onto managers for at least five solid years - especially if it's a chronic problem.
To find out how long has the manager of your fund been in charge, check the company's marketing material or the fund prospectus - otherwise call your financial advisor or the fund company directly. While some funds are able to install more than capable replacements for their departing managers, not all have been able to keep quality at the helm.
University Avenue Canadian fund is a prime example. It has languished for years with a tiny $3 million asset base and has gone through three managers in the last five years. Black Investment Management ran the fund (and did quite well) during its first five years, after which they departed and were replaced by the high flying Jonathan Baird (formerly of Dynamic) in 1995. Under Baird's direction and thanks to a gold frenzy (his specialty), this fund was on fire - only to see its flame fizzle soon afterwards. Baird fled to CI late in 1997 for a short stint, and was replaced by Judy Cameron of Alpha Quest. In February 1999, performance issues prompted another change - enter Robert Boaz of University Avenue Asset Management. Boaz' tenure on the fund has seen mixed results to date but University Avenue unitholders should have better days ahead with the recent merger with Argentum and a recently formed internal money management arm.
Investors in the old 20/20 Canadian Growth fund (now known as AGF Canadian Stock) have also seen a flurry of management teams pass through the revolving doors over just the past six years. Connor, Clark and Lunn had managed the original 20/20 fund since 1989 until mediocre performance lead the firm to bring in pension manager Ultravest to take over in 1994. In 1996, while Ultravest was still running the fund, Veronika Hirsch joined the firm and was scheduled to take over management of this fund. Before she had a chance to, however, Hirsch left to work for Fidelity later that year, leaving AGF's Laura Wallace in charge of this abandoned ship. After two years of so-so results, Martin Hubbes (another internal manager) took over and the fund absorbed AGF's old Canadian Equity fund. Since Hubbes took over, his value-conscious growth approach has resulted in an impressive turnaround. Sure, technology is at the root of his success but banks and energy stocks are also sprinkled throughout the portfolio as an offset.
Firms that are able to orchestrate smooth transitions have at least one of the following characteristics:
1. Disciplined Structure
Firms with a culture and process that promote succession are the best at handling such transitions. Fidelity is one of the best examples and is well known for plucking fresh MBA graduates from ivy league schools and starting them as junior analysts. They then move up, in a defined order, to senior analyst, associate portfolio manager, then lead manager, and eventually team leader.
When the Fidelity Capital Builder was struggling under George Domolky, he was first assigned additional analyst assistance. Then, they brought in Thomas Sweeney as lead manager, leaving Domolky to assist for a short time. When that didn't work, they went with the fresh Bob Haber, who also runs the Disciplined Equity. His growth style was welcomed in this momentum-driven market as performance has finally turned around. Fidelity has also managed very successful manager changes with their True North, European Growth and Growth America funds.
2 Team Oriented Process
An investment approach that emphasizes a team based decision-making process is superior in the context of succession planning and continuity. Templeton Management Ltd. has hundreds of analysts around the globe that screen thousands of stocks, narrowing the huge universe down to a few hundred that meet the firm's valuation criteria. Though individual managers are free to pick their favourites, they usually can't go outside of the approved list. Templeton has had many lead manager changes over the years, but they've been smooth and largely unnoticed because of the disciplined process they practice.
Brandes Investment Partners runs three funds for AGF Funds. Anybody at the firm will tell you that it doesn't matter who the lead manager is because all buy and sell decisions are approved by Brandes' investment committee, not by the individual lead managers. Having that level of conviction in your team and process reduces the influence of, and reliability on, any one individual.
3 Internal Depth and Strong Alliances with or Ownership of Third Parties
When a fund company owns other money management firms or has strong relationships with outside advisors, it provides them with the resources to fill any hole left by a departure. Spectrum Investments has done a great job over the past couple of years in reorganizing their manager assignments. When Kiki Delaney and partner Lynn Miller left to manage money for Trimark, Spectrum worked quickly to find good replacements.
Kiki Delaney's Spectrum Canadian Equity fund was given to the highly respected McLean Budden (both McLean Budden and Spectrum are owned by Sun Life). Spectrum Canadian Growth (then managed by Lynn Miller) was changed to a multi-manager fund, with Howson Tattersall (Saxon Funds) handling value stocks, John Mulvihill (Mulvihill Capital Management) picking growth stocks, and Mercury Asset Management in charge of foreign stocks. These changes were positive and left unitholders with management talent that was just as good (if not better) than the departing managers. Spectrum's parent also owns Boston-based giant MFS Investment Management, one of the world's largest money managers and continues to have strong relationships with other outside management firms.
It is important to invest in resourceful firms with strong organizational structures because investors can't always sell their fund to buy another. Sometimes tax liabilities tie investors' hands, so it is important to invest with a company that can absorb such occasional changes. Other firms that possess at least one of the above mentioned traits include (among others) AIM, Bissett, CI, CIBC, Mackenzie, Perigee, PH&N, Standard Life, TD Asset Management, and Trimark. So if you're invested with one of these firms (or another with these qualities) and a manager change occurs don't panic - they just may find a better replacement.
In the near future, I'll examine the flip side: individual managers worth following.
Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at email@example.com
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