Fund manager has quit? What not to do

Sandip Sabharwal has left. What should I do with my investments in Magnum Contra?"

With Indian fund managers changing jobs with great gusto, such questions from worried investors have become quite common. Last year, one or more equity funds of 13 fund houses (of a total of 28) have witnessed a change in the fund manager.

Investors' anxiety is not without reason. After all, the very basis of mutual fund investment is to leave the job of picking right stocks to a more knowledgeable person.

When you invest in a fund, you are basically hiring a fund manager, everything else is secondary. And it's the ability of the fund manager that generates the returns in his funds.

So when you get the chilling news about the exit of the brain behind the success of your fund, it is like being on a ship where the captain has jumped off.

Which brings us to: What should you do?

Should you jump off the ship? Or, should you hang around to see what happens?

To be honest, this cannot be answered with a plain yes or no. Here are some questions that will help you reach a decision.

• Is it the right time to invest in funds?

Is the fund a one-man show?

The role of a fund manager in the success of a fund does get over-emphasised sometimes. Because of the publicity the fund manager gets, he tends to become the face of the fund, and people start associating a fund with its manager alone.

However, there is a whole team of researchers, coupled with strong management systems that work behind the curtains to make the fund a success.

A skilled fund manager, without the support of a competent research team and proper systems in place, will probably be able to achieve much less. Of course, this is not the universal truth. There are funds where the fund manager is just a figurehead and there are others where he really is at the centre of the action.

Ravi Mehrotra, CEO, Franklin Templeton, gives a nuanced view of the role of an individual fund manager and how his exit may impact a fund. "(The impact of a fund manager's exit) actually depends on the respective fund house and the philosophy and process they follow. The ones following an individualistic approach could suffer from a high profile exit, while those who follow a strict process might stifle individual contributions.  We believe that an ideal approach would be a combination of both these styles." 

You must ask yourself how process driven your fund is.

Funds that are guided by a very specific investment strategy are likely to depend more on numbers and equations and hence, will suffer lower impact of a change in the fund manager.

Take the case of a dividend yield fund as an example. The selection of stocks will be restricted to those that offer high dividend yields. Or, an index fund, which will only invest in the stocks that form the index which they have selected to benchmark against.

The point is that the more mechanical the fund's stock selection process, the lesser the impact of the fund manager.

Ved Prakash Chaturvedi, CEI, Tata Mutual Fund, says, "Investors should look for those funds which are not dependant on individuals or personalities but rather on processes and which have demonstrated a long term track record of delivering value irrespective of individual changes.

Sandesh Kirkire, CEO, Kotak Mahindra Mutual Fund agrees, "I think investors should look at the institution to whom they are investing their funds with rather than the fund manager."

• Stock picking is an art, not a science

How experienced is the new fund manager?

The new fund manager may have a lot more experience in fund management than the departing one. This would be an encouraging sign.

One can also expect things to continue in pretty much the same way if the  new manager happens to be a person who has served on the research team of the fund house for long. If that is the case, he will clearly know the investment strategy employed by the former manager and the nitty-gritty of it in detail.

Have the investment objectives changed?

Generally, the fund house will not alter the objective of the fund.

But keep a track to see if the fund has declared any change in the investment objective.

In the case of a stock, the exit of key personnel can play havoc with the stock price. This is not the case with a mutual fund.

For one, the new fund manager will not turn the portfolio upside down right from the word go. So the competence (or incompetence) of the new fund manager will begin to get reflected only over a period of time.

We had done a study in June 2005 where we observed the effect of fund manager changes on the performance of the fund. We looked at 17 diversified equity funds in existence since 2000, that had experienced a change in the fund manager at least twice.

Upon comparing their quarterly returns vis-a-viz their peers, we concluded that a change in the fund manager did not have a significant impact on their performance. The bad funds continued to perform badly, the good ones continued to deliver above average returns.

Often what happens is that as soon as the news of a fund manager's exit becomes public, investors spring into action.

The pressure to act is so intense that they want to do something about it instantly.

But, there is no need to press the panic button. Just keep an eye on your fund.

If you have made up your mind to exit your fund, see whether you are about to do a favour to the taxmen.

If you sell your equity fund units within a year of buying, you will have to pay a short-term capital gains tax of 10% on the profits. Sometimes, it pays to wait!