Fund manager change is not a uncommon phenomenon in the mutual fund industry. But not many investors know how to deal with such a situation.
Should you sell your investment immediately post the manager change if your investment in the fund was basis the previous manager's sound track record? Or should you wait for some time and understand how well the new manager does and then decide whether to hold or sell? These are questions that linger in an investor's mind in case of a change in fund manager.
Investors often invest in a fund based on its superior historical track record. Strong historical performance of a fund vis-à-vis its peers and benchmark could be a result of a combination of two factors: people (fund management team) and investment process.
Both these factors drive the fund’s performance and therefore, any change in one of these factors can impact the fund's performance. A sound investment process without successful execution by experienced and skillful fund management team could impact the fund.
However, an experienced fund manager with a not-so-well-articulated process can drive the fund’s performance upwards, given his hands-on experience in managing a particular type of fund.
Answers to the following questions can help you in making a right decision:
How important was the old fund manager?
If the strong historical track record of a fund is solely because of the superior fund management skills of the leaving fund manager, then yes, it calls for selling your investments in the fund. However, if an equally experienced fund manager has replaced the earlier fund manager, you can stick to your fund and review your decision after six months to one year. Consider for example, Sandeep Sabharwal, who turned around equity funds' performance at SBI Asset Management. When he left SBI, he was replaced by an accomplished fund manager, Sanjay Sinha, who successfully carried the show ahead.
What is the track record of the new manager?
If an experienced fund manager has taken over reins of your fund, you can study his historical track record and determine how successfully he has managed other funds in the present organization or in his previous organizations. If a fund manager with less or no track record takes charge of your fund, then you might want to consider a case of shifting your investments into an another well managed fund with superior management team , investment process and performance track record. The manager’s investment style would also be a critical factor while making a decision to exit a fund or not. Some fund managers would be quite successful while managing large-cap funds, but not so well with mid-cap funds or sector funds and therefore, you can study what type of funds the new manager previously managed and whether he can successfully run the show ahead.
Would there be a smooth transition?
Now, this is equally important. A smooth transition can help the new manager in understanding the processes and fund holdings relatively in faster way. The new fund manager would take time to understand the fund’s portfolio and might consider changes, which would take some time – say three-six months, especially if it is a new recruit from outside the firm. If a fund manager abruptly leaves the fund house, which would mean that the fund company would start the search for new manager then and therefore, the fund’s performance suffers during the search and new managers’ learning period.
Would investment strategy of your fund change?
If change in fund manager results into change in investment strategy of the fund, then yes, you must review the strategy and take call whether your risk appetite is in line with the changed strategy. You invest in a fund with a certain investment objective and if the strategy changes, you can be prone to higher risk. Consider for example that you are a conservative equity investor and invests only in large cap funds. However, post the manager change, the fund turns into multi cap or say invest certain portion in mid caps. Don’t be surprised here. Fund companies do not always change the investment objective, however, still they change the strategy. The change in investment strategy does not always come with change in fund manager. Some funds are clearly identified as large-caps from their historical investment styles, but can sometimes invest in mid caps. Consider for example, HDFC Equity, considered to be a large cap fund, now invests in mid caps too.
These are some of the factors you can consider in an event of change in fund manager. However, it is impossible to know how eventually the fund performs under the new manager. But, answers to the above questions can at least make your investments decisions easier. While considering sell of your mutual fund investments, it is always important to understand your tax implications. Under the current tax structure, short-term (less than one year) capital gains are taxed at 15%, while there is no tax on long-term capital gains.