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Fund Spy
Manager changes often mean trouble
Changing a manager at a mutual fund has its peculiar risks. The new manager may have a different style or have little talent. Heres how to spot the warning signs of a bad transition.
By Morningstar
It can be difficult to know how to react to manager changes. After all, they come in a variety of shapes and sizes, ranging from marked changes for the better to decided switches for the worse.
Therefore, we've decided to provide some guidelines on manager changes. While each transition is unique, we think it's possible to generalize about which ones provide little reason for worry or even grounds for optimism and which ones are cause for concern or even a basis for alarm.
Changing strategies?
A manager transition that involves a major strategy change is always cause for pause. Even if the new manager has succeeded elsewhere -- and thus offers grounds for optimism -- the new strategy is likely to create asset-mix issues or other problems for many shareholders.
The recent manager change at AIM Opportunities I (ASCOX) illustrates why. Roger Mortimer and Glen Hilton replaced Charles Scavone and Brant Demuth in late November. (Co-manager Robert Leslie remains on board.) The fund adopted the new duo's value discipline at the same time.
And while Mortimer and Hilton have earned good results with their miserly approach at their other charge, AIM Global Value A (AWSAX), investors who bought AIM Opportunities I for its small-growth style have ample reason to be disappointed. The fact that the new duo is also more conservative than the old pair when it comes to shorting stocks exacerbates the matter.
Watch the results
Manager changes that don't involve strategy changes can also be worrisome. Indeed, for obvious reasons, shareholders should think twice whenever a good manager is replaced by a manager from inside or outside the firm who has an identical or very similar investment philosophy, but has delivered disappointing or uninspiring results at his or her other offerings.
Shareholders also have reason to be concerned when a talented manager is replaced by a like-minded and skilled individual who has taken on too many offerings.
Who else left?
It's quite disconcerting when a successful fund loses several members of its management team along with its lead manager. Recent exoduses at Sentinel and Columbia are cases in point.
When longtime lead manager Scott Brayman left Sentinel Small Company A (SAGWX) in September, analysts David O'Neil and trader Deborah Healy departed along with him, leaving analyst Chuck Schwartz as the sole remaining member of the team. In response, Sentinel promoted Schwartz to manager, moved a former analyst back to the team and has plans to hire another analyst soon.
Manager Rick Johnson took three of his four analysts with him when he left Columbia Small Cap Growth (CMSCX) and Columbia Mid Cap Growth (CLSPX) in June to start his own asset-management firm. The remaining analyst and a former tech analyst now run the funds, along with four newly hired analysts.
Too many cooks
Finally, it's downright alarming when a manager change follows quickly on the heels of one or more previous changes. Credit Suisse International Focus (WPMFX) is an example. That fund has had four lead managers since opening in 1997. Strategy adjustments and the absorption of two sibling funds have added to the turmoil there.
These guidelines should provide helpful context for evaluating negative manager changes. That said, each manager transition should be analyzed individually in the end, and shareholders should always carefully examine their tax situation and all their options before they consider selling any fund.
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