To Stay or to Go When Fund Managers Change

Putting all of your eggs in one basket extends to your choice of fund managers as well as investments, according to a recent Barron’s article. While understanding a manager’s philosophy and approach should clearly play a role, the article argues that it is equally important to fully grasp the fund’s fee structure, its inner workings and the team behind the manager.

If and when there is a change, the article asserts that this information is “critical” for deciding whether or not to follow a manager. “Generally speaking,” it says, “the larger the fund company, the safer it is to assume that any one person isn’t all that important. And the more securities a fund invests in and the more trading it does, the less likely one person can execute its strategy alone.”

The analysts and traders working behind the scenes play a very significant role in a fund’s operations but rarely get any publicity, according to the Barron’s piece. At American Funds, for example, analysts manage a portion of holdings referred to as the research portfolio. According to Rob Lovelace, the vice chairman of Capital Group (the Funds’ adviser), this portfolio always represents the largest component of the company’s funds. “If you had to ask me who the most important people in our system are,” says Lovelace, “it’s for sure the analysts.”

The article argues that traders are equally, if not more often overlooked. At high-turnover funds, however, they play a vital role. Amber Anand, a finance professor at Syracuse University who analyzed real trading data for funds from 1999 through 2008, says that while fund outperformance is “hard to find”, a “fairly large chunk of that outperformance can come from running a better trading process.”