Mutual funds are only as good as the people behind them: the fund managers. Portfolio managers are the people who decide what to buy and what to sell, and when. Because the fund manager is the person who is most responsible for a fund's performance, knowing who's calling the shots and for how long is key to smart mutual fund picking.
We think it is always important to know who a fund's manager is, whether the fund is run by one person or a whole team. Equally important is how long the person or team has been running the fund. Make sure that the manager who built the majority of the fund's record is still the one in charge. Otherwise, you may be in for a surprise.
Impact of manager departure can vary fund to fund. Yacktman leaving YACKX might have different impact compared to Joel Tillinghast departing FLPSX. The reason is obvious –fund companies such as Fidelity, vanguard, etc have very deep bench of managers and analysts but that’s not true for fund run by a family or small company. Another example that stands out – Chuck Akre recently left FBR funds and started his own fund AKREX – this led to migration of some followers from FBR to Akre funds.
Infact we consider that a fund manager should have long term record and should be equipped with at least one bear and bull market. A captain of ship who has always sailed in smooth seas can turn blind eye to indications of forthcoming storm. If you're looking for new investments and find two equally good funds, choose the one with the more experienced manager.
When Manager are not so critical to the Fund:
1. Managers of index funds are not actively choosing stocks, but simply mimicking a benchmark by owning the same stocks in the same proportion.
2. The difference in return between a great and an awful ultrashort-bond fund is a matter of one or two percentage points. So if your ultrashort-bond fund manager leaves, it's probably not a big deal.
3. Manager changes aren't quite as troubling if you're talking about a fund from a family, such as Fidelity, T. Rowe Price, and American, with a number of good funds and a strong farm team.
4. While this isn't always the case, you'll often find that funds run by teams are less affected by manager changes than funds run by only one person.
When Managers matter the most:
- One-manager funds.
- Funds run by very active managers who've proved to be adept stock-pickers or traders.
- Good funds from families that aren't strong overall, or from fund families that lack other strong funds with a similar investment style.
- Funds in such categories as small growth or emerging markets, where the range of possible returns is very wide.
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