28-Dec-2004
December/January Making $ense Newsletter
Turnover at the Top
Five tips for scrutinizing a new fund manager
You may be planning for your retirement – at least we hope you are – but when the manager of your favorite mutual fund retires, your investment can quit working, too. “Funds that have been managed by particularly successful managers may well experience a drop-off in performance,” says Kevin Gahagan, a San Francisco financial planner. Here’s how to tell if the new boss is a wiz or a washout:
• Check the Lineage: Ideally your new manager was a co-manager or assistant manager under the old leader. If so, he or she probably shares the outgoing manager’s investing philosophy and helped choose the portfolio’s securities. New managers – particularly outsiders – like to put their mark on a fund by replacing old holdings with their favorites.
• Get Personal: Read the new manager’s bio on the company’s website, in the fund’s prospectus and at www.morningstar.com (or in Morningstar’s hard-copy reports, available at most libraries).
• Beware of Mystery Teams: Many team-managed fund-shops – among them American Funds and Dodge & Cox – have great reputations. But be wary if a well-known fund manager is replaced by an anonymous team. Because of a legal loophole, fund companies don’t have to notify shareholders of personnel changes to a team-managed fund.
• Follow the leader: Keep an eye on how the succession plays out over the next year or two. Beth Terrana retired from Fidelity Fund in 2000 after a seven-year tenure, and two new managers have succeeded her – without her success. The once highly regarded fund is now considered a middling offering among Fidelity’s large-blend fund options.
• Look for Style Changes: Watch for dramatic shifts in investment strategy (such as a switch from companies with rising earnings to unprofitable companies with strong prospects for growth). “If the fund’s style changes drastically, that may not be bad for the fund,” says Greg Carlson, a Morningstar analyst, “but the fund may no longer fit into the investor’s portfolio in the same way.”
This article originally appeared in AARP: The Magazine
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