What to do when your fund manager quits?

In the mutual fund industry, everyone talks about the long term. But like many of us, even fund managers quit their jobs. And when a popular old-timer moves on, then it makes news.

Most of you are already aware that recently, Prashant Jain of HDFC AMC resigned after being its fund manager for decades. Despite the recent phase of underperformance, which can be attributed to contrarian stock bets, there is absolutely no doubt that the long-term performance that his funds delivered (given the AUM) were excellent.

This move has many investors of his funds asking questions like:

• Do ‘star’ fund managers take ‘performance’ with them?
• Should investments in the fund be redeemed immediately?
• Should fresh SIP investment be continued or stopped?

Recent history of impact of star fund manager exits

Have a look at how funds fared before and after the fund manager’s exit:

To be fair, this before-and-after analysis should not be solely based on the presence and absence of the fund manager. How these two phases overlapped with market cycles also plays a huge role in how funds delivered during both phases.

But if you look at the table above, then it is clear that quite often but not always, the fund performances dipped substantially and the AMCs, at least temporarily, found it difficult to fill the shoes of the exiting fund manager. On the other hand in many cases, the AMCs managed the transition well, and the new fund manager’s performance remained acceptable, or even improved.

Typically, all fund houses will try to divert news of the fund manager’s exit with statements about how they already have an in-house investment process which will help smoothen the transition. But you cannot rely blindly on what they are saying. You need to be alert over the next year or so. Here is how.

What to do when your fund manager moves on?

The exit of the fund manager cannot be ignored but it is also not necessary for you to act immediately:

• Many people will say that one should scrutinise the AMC. its processes, its team, philosophy, etc., to decide whether to stay put or exit. But frankly speaking, most small investors will not be able to analyse funds through these lenses.

• So what you should do is simple — watch the fund’s performance for three to four quarters. Give time to the new manager. If performance starts slipping compared to the category and peers, then that is a red flag.
• Watch out for changes in the scheme’s turnover ratio. If this starts increasing or there is a spike, then it means that the new manager is changing the fund portfolio, and this can mean a possible change in the return-profile and risks taken in the near future.
• Do check how the scheme’s weight towards large-caps vs. non-large-caps is changing (within SEBI specified category definitions).
• Also, whether the new manager is switching styles from value to growth, or vice versa, or something else altogether.

To be fair, all AMCs try to de-risk themselves from such exits. Some are successful and some are not. But if after a few quarters there is deterioration in the fund’s relative performance, and/or there are major changes in style/strategy, then it is better to consider exiting.

You can approach this in three phases:

• For the initial few quarters, continue your regular SIPs and keep things as they were before.
• If the red flags discussed earlier appear after a while, then stop your SIPs.
• Over the next few months/quarters and depending on the market conditions and your tax liability, gradually exit from your investments in the fund.

I have written earlier that we need to be careful so as not to be blinded by the stardom of fund managers. As an investor, you need to remember that even heroes can go wrong.

The way out of this fallacy is simple: diversification.

Unless your portfolio is very small, it is best to diversify your MF investments across categories, AMCs, investment styles. No strategy or style of fund manager will work forever. So diversify. That way, you will not be hit hard if one style/fund manager does  not work.

Also, understand how to pick the right funds correctly. Do not go after the chart-toppers each year. You only need few fund categories to pick good schemes for your portfolio. If you do not know how to do that, stick with index funds. Else, get in touch with a good investment advisor to help build your portfolio.