Should You Stay When There’s a Management Change? It Depends
Two weeks ago, after 15 years at the helm of the Babson Value fund, manager Roland “Nick” Whitridge abruptly stepped down, citing health concerns. He also resigned as co-manager of the Shadow Stock fund, which he had run for about a dozen years.
In a letter to shareholders, Whitridge described it as “the most difficult decision I have ever had to make.”
Now shareholders of those funds face a difficult decision of their own: With the manager gone, is it time for them to leave too?
It’s a question more and more of us are having to ask. Over the last 12 months, three out of every 10 stock mutual funds have changed managers, according to Chicago-based fund tracker Morningstar Inc.
Some did it in an effort to improve performance. Last month, for instance, Stein Roe replaced Gloria Santella, manager of its one-star-rated Capital Opportunities fund, with David Brady and Erik Gustafson. That’s the team that’s been running the successful Young Investor fund for the last four years.
In other cases, a good fund manager has left, forcing a change.
Consider the chain reaction last week at Fidelity Investments. On Tuesday, Katherine Collins announced she was stepping down as manager of the four-star Fidelity Mid-Cap Stock fund.
Fidelity then tapped David Felman, manager of its four-star Convertible Securities fund, to take over. But that left Felman’s convertibles fund without a manager. So Fidelity assigned Beso Sikharulidze, manager of its five-star Select Health Care fund, to the job.
Replacing Sikharulidze at Select Health will be Ramin Arani, manager of Fidelity’s five-star Select Retailing fund. And replacing Arani there will be Steven Calhoun, the firm’s director of associate research.
“For most mutual fund investors, a management change to their fund can be a time of anxiety,” says Joseph Espaillat, an analyst with the Value Line Mutual Fund Survey in New York.
Which is understandable. When you invest in a fund, you’re really investing in that fund manager (passively managed index funds, of course, are an exception).
And a fund manager can effect change within his or her portfolio more quickly, and more dramatically, than even the most aggressive chief executive can at a corporation (with all due respect to “Chainsaw Al” Dunlap).
New mutual fund managers often step in and immediately overhaul most of the portfolio to suit their style. Which explains why the turnover rate at stock funds with new managers tends to be close to 110% (meaning the entire portfolio is sold and replaced in less than a year’s time). That’s about 50% higher than the turnover rate of funds with experienced managers.
In the long run, these moves may or may not be good for the fund. But in the short run, they usually hurt the fund’s performance.
Which is pretty much what a recent Value Line study found. “New managers, in their first year, fare poorly relative to well-entrenched managers,” according to the study.
And the study found that it often takes new managers a good three years to “hit their stride” and outperform more experienced counterparts.
Does this mean you should jump ship immediately after the manager abandons it?
“I’m not that impulsive,” says Christine Fahlund, financial planner at T. Rowe Price Associates. Nor should you be.
After all, if you had left Janus Twenty in 1997, shortly after manager Tom Marsico stepped down to start his own fund, you would have walked away from total returns of 74% the following year.
Instead, let the type of fund you’re dealing with--and the new fund manager’s actions--dictate your course of action.
Whitridge’s two funds offer a good illustration.
To start with, the $45-million Shadow Stock fund, which invests in small stocks, is co-managed. And Catherine Ryan, who has worked alongside Whitridge, is staying put.
This is one reason to lean toward sticking with this fund--or at least giving it the benefit of the doubt.
Here’s another reason: “The fund is quantitatively driven,” notes David Masters, senior mutual fund analyst with Standard & Poor’s Fund Services in New York. In other words, computer models do much of the work in picking the stocks that end up in this fund. And, according to Babson Fund officials, there are no plans to tweak or in any way change those models, which ferret out tiny undervalued companies that Wall Street analysts don’t cover and that institutional investors largely ignore.
Finally, the fund invests in more than 250 companies. So even if a new manager wanted to invest in new stocks, he would have to alter the entire portfolio drastically to effect real change.
On the other hand, the $1.2-billion Babson Value fund has been run by a single manager--Whitridge.
True, there are quantitative aspects to the fund’s stock selection system. But Whitridge had a freer hand in guiding this fund than Shadow Stock. Plus, it’s a concentrated fund. Babson Value holds only 40 stocks at a time.
“Obviously, in a concentrated fund, if the manager comes in and makes changes, those changes in general will have that much more impact,” Masters says.
To be sure, Babson officials stress that this fund, like Shadow Stock, will be managed in the same way Whitridge ran them. (Tony Maramarco, who’s taking Whitridge’s spot on both funds, worked extensively with him on Babson Value.)
Still, based on the type of fund it is, you may want to lean toward leaving Babson Value. But don’t bolt just yet.
Instead, put this fund on a watch list. That means instead of checking up on it once a year or so, monitor it on a quarterly, even a monthly, basis.
“You should look for some sort of material change in the investment policy, and investments, of the fund,” Masters says.
A material change can be spotted by checking:
* Top 10 holdings. “Any significant shifts in the top 10 holdings may set the alarm bells going,” Masters says.
While funds are required to provide this information only twice a year, many provide it on a quarterly or monthly basis to publications such as Morningstar Mutual Funds. Some even post these lists on their Web sites.
* Style box. Morningstar, Value Line and other fund-rating services will characterize a fund based on the type of stocks it owns.
For instance, Babson Value is considered a “large value” stock fund. (This information can be found on Morningstar’s Web site, https://www.morningstar.net, or in the Value Line Mutual Fund Survey, available at large public libraries.)
If the fund shifts soon after the new manager takes over and is re-characterized as a “mid-cap value” fund or a “large blend” fund, that’s a good sign this fund may be doing things you don’t want it to.
* Turnover rate. If you’re in a fund that has historically had a turnover rate of, say, 25%, and all of a sudden the figure jumps to 100%--or even higher--it’s a good sign the new manager is making major changes. This information is available through Morningstar or Value Line.
After a quick check of these numbers, you may indeed decide to bolt. Or you may like the changes the new manager is making.
The point is to check to see if the fund you’re in is still the fund you want.
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Do you have ideas for mutual fund and 401(k) topics for this column? Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.
