Fund Performance Not Impacted by Management Change

Management changes have no effect on fund performance, according to research by Morningstar. The firm says the outflow typically associated with management change is an investor flaw rather than a reflection of the fund’s management style and underlining principles.

Morningstar points out that management changes rarely result in changes to the fundamentals of the fund and how it is actually run. The firm embarked on its latest research in following the “catastrophic outflows” associated with “highly publicized management changes—most notably, Bill Gross of PIMCO or Greg Serrurier of Dodge & Cox.”

Morningstar urges investors to ask themselves a series of questions following major management changes. These include asking whether the fund is truly an outlier in the sense where the fund is truly run by an individual whose strategies and insight can’t be replicated. Morningstar finds this is rarely the case and notes that today more than ever before, fund management is essentially a team-oriented science.

In addition, investors should ask themselves about the tax implications of the fund and determine whether selling would leave them responsible for an unnecessary tax bill. The fund’s expenses also need to be put under a microscope. If they increase as a result of management change, Morningstar suggests pulling out of the fund may be justified.

In most cases, however, management change leads to business as usual. Morningstar finds “there is zero relationship between a management change and future returns over the next month up to the next three years. Furthermore, this holds true for all different types of management changes. Gross excess performance does not depend on the fund’s alpha, size, or industry experience at the time of management change.”

Moreover, management change isn’t necessarily a major shift as some investors may surmise.

The firm notes that “Since January 2003, in the U.S. actively managed equity and fixed-income space, an average of 244 funds each month undergo some form of a manager change, whether new managers are added or tenured managers are removed. While this accounts for less than 1% of fund offerings, they represent on average $220 billion in assets under management. Despite the magnitude of this turmoil, these facts go underreported relative to other, singular, high-profile management changes.”

Taking this into consideration, Morningstar asks whether the management changes at name-brand funds warrant the attention they get. The firm suggests investors avoid knee-jerk reactions and take a closer look at what, if anything, is changing in the fundamentals of the fund.

Morningstar concluded, “No matter which way we sliced the data, we found statistically no relationship between future performance and adding or removing a single manager or an entire team. This is shown in two ways. First, the models r-squared is effectively 0% … Second, even if variables are statistically significant, the economic significance is negligible. For example, a management change happening in the past seven to 12 months at a fund with alpha above the category median increases the fund’s gross excess return by 0.1 basis points over the next 12 months. A 0.1 basis point increase is hardly an impact.”