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How Bad is Change in Manager?

Should you be worried about the fate of your fund after change in manager? The spontaneous answer on most occasions would be affirmative. However, our research shows it does not affect your fund's performance

The central idea of a mutual fund investment is to leave the job of managing your money to a professional fund manager. And the success with which he has been able to take the right calls on behalf of the investors gets reflected in the performance of his fund. Thus, you screen the funds on the basis of their performance record, and the kind of returns that they have been able to deliver over a period of time as compared to peers. Finally, you zero down to a fund that appeals to you. You entrust your hard-earned money to the fund manager, only to find that within months, he leaves.

Changes in fund managers are not rare. But what is more important is that should you, as an investor, be worried about the fate of your fund in such a case. The spontaneous answer on most occasions would be affirmative. A change in the fund manager tends to add to the uncertainty, and all humans hate to live with uncertainty. But looking at the performance of funds that have witnessed changes in the fund manager, much of those worries should vanish.

For this purpose, we looked at the diversified equity funds that are in existence since the year 2000, and have experienced a change in the fund manager at least twice, the first change occurring by the end of year 2003, so that sufficient performance record pre- and post-change is available. We identified 17 such funds.

Upon comparing quarterly returns of these funds, vis-à-vis their peers, one can conclude that a change in the fund manager did not have a significant impact on the performance of the funds. The bad funds have continued to perform badly, while the good ones have continued to deliver above average returns.

Therefore, as an investor, one need not feel too concerned if his fund faces a change in the manager. This is because a fund's performance is not solely dependent upon a fund manager, but on the quality of the entire research team.

A look at the portfolios reveal that there have not been massive churnings and portfolio makeovers subsequent to the change in the fund manager in most of the cases, but there have been some instances of significant sectoral reshuffles. For example, after a change of the fund manager of Canexpo in December 2004, sectors like consumer durable, consumer non-durable, and financial services were added to the portfolio, while the allocation to services sector was reduced significantly. On the stock level, the fund manager exited stocks like Shipping Corporation of India, Great Eastern Shipping, while some of the banking stocks were added to the portfolio.

Similarly, a change in the fund manager of Alliance Basic Industries during September 2003 brought notable changes to the portfolio. The number of stocks went down from 23 to 17, with the allocation to top 5 holdings rising from 43.8 per cent to 52 per cent, thus making it more concentrated. The manager exited Reliance Industries, which used to account for as much as 6.8 per cent in the preceding month. While the exposure to metal stocks increased, the share of energy went down and diversified stocks completely disappeared from the portfolio.

Thus, one can say that a change in the fund manager does have the potential to bring significant changes to the way the fund is run. However, you as an investor should not press the alarm button too soon. Ideally, it should only raise your level of attention towards your fund so that you track its performance a little more closely for the next few months.

You may consider exiting the fund if it under-performs its peers consistently, or if there is a drastic change in the management style of the fund, for example, the fund starts maintaining a highly concentrated portfolio in place of the diversified portfolio which was more suited to you.