Should you stay or should you go?
No, not a headline from the cover of
. You don't have to be a lovesick single to face that question these days. It's one that fund investors can't avoid.
With skittish shareholders trading funds like stocks and fund managers on the lookout for more money (in the portfolio and in their paychecks), you need to know what to do when a manager quits -- or is shoved out. Take a look at some of the high-profile names gone just in the past few months: Ryan Jacob of the
Internet fund --
quit; James McCall of four
funds -- replaced; Gloria Santella at
Capital Opportunities -- gone; Pat Adams of
Select -- out.
Simple, right? Conventional wisdom tells you to take your money and run. The departure of a manager is supposedly one of the clearest exit signs on Wall Street.
But the rules of the road there are changing, so fund investors need to shift direction a bit, too. It's no longer enough to inquire, "What's the new manager going to do?" You also have to ask, "What are the shareholders likely to do?"
And along with keeping an eye on that maverick manager, you need to understand the shop backing him or her up. The strength of the organization behind your fund is key to knowing if you should hang on or leave. A big, stable fund family is much more likely to have the resources to train and attract several levels of top talent than a tiny fund from a small upstart that may not be able to weather rapid redemptions. Increasingly, it's all in the family.
Consider Tom Marsico, one of the most respected managers in the business and long the face of
, with good reason. For more than a decade, Marsico ran Janus' chart-toppers, not only pounding his peers but besting the market, too. Then, in the summer of 1997, the growth-fund guru suddenly left to start his own firm. A clear case that shareholders should bail? Not necessarily.
Those who followed Marsico are surely not disappointed. In 1998,
Focus delivered better than a 50% return. But those who stayed behind certainly have no regrets either. Although it stumbled a bit of late, Marsico's old fund,
Janus Twenty, under Scott Schoelzel, was up a whopping 73% last year. And that makes sense. Janus is a large, established fund firm with a stock-picking style that can transcend a single manager.
Same is true at
Franklin-Templeton's Mutual Series
. When legendary value investor Michael Price stepped down last November, a team of his longtime advisers who helped him pick stocks for years took over. Since then, the firm's major funds,
Mutual Shares and
Mutual Beacon, are posting much higher returns and rankings than in the 12-month period before Price left.
Other strong fund families?
T. Rowe Price
have sturdy benches, as does
. Managers at that Chicago-based company choose stocks from the firm's preferred list, and all follow a strict value philosophy.
But is your fund part of a smaller family? In a volatile sector (as with the Internet fund)? Think twice about sticking around when a manager disappears. Besides the risk that the firm won't have a No. 2 person up to the job, you have to factor in the psychology of the other folks in the fund. A lot of redemptions can spell big problems for a small fund. If shareholders bolt (and who is more jittery than Internet investors?) and take their money with them, the new manager faces a shrinking asset base and may be forced to sell stocks he or she wouldn't have sold otherwise.
Remember what happened when Garrett Van Wagoner left
Govett Smaller Companies at the end of 1995? After three years as No. 1 in the small-growth category, the fund plunged, coming close to dead last each year from 1996 to 1998. Govett is a small shop without adequate backup. Govett Smaller Companies is already on its third manager (with little success) since Van Wagoner's exit.
Of course, there's one class of stock funds where you don't need to spend much time on this question. While I have great respect for fine index fund managers who control costs and use trading to their advantage, I wouldn't worry much if even Gus Sauter of
500 Index left. A manager's departure is mainly an issue for active funds, not passively managed ones.
One last note: Complicating your decision are tax implications. If your fund is in a taxable account and you've held it for years, even if it hasn't been a stellar performer recently, you could be hit with a big taxable gain when selling. Also, keep in mind that if you stick with the fund and a new manager comes in and wants to revamp the portfolio, you could face a sizable capital-gains distribution.
Bottom line? When your manager hits the road, you can't figure out "should I stay or should I go?" without studying the shop that supported him.
Yeah, it would be easier if we could just pick our managers and count on them to stay put, or if we could follow them around like the
. But in my opinion, this isn't such a bad thing. As I
wrote recently, I'm no fan of the way we worship "heroic" fund managers. When "family" matters, we're forced to look behind the face of a fund. And that makes us better investors.
Whaddaya think? New money is shifting from funds to stocks. Are you? Why?
Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at