There's No Performance Drop When Managers Exit?
Last week, two Morningstar quantitative analysts issued a new study finding “no relationship” between long-term fund returns and management turnover. That might surprise advisors who’ve taken calls from worried clients when highly respected managers create a media stir with their exit.
“This just goes against all intuition – you’d just naturally assume that turnover is a key event to follow,” says Phoebe Venable, president at CapWealth Advisors in suburban Nashville, Tenn., which manages about $800 million.
But Morningstar insists that’s the point. “If clients see a management change in one of their funds, their advisors can use this research to show that they’ll probably be okay – just be patient because it’s probably not going to affect their portfolios,” says Madison Sargis, a co-author of the study.
In reality, such an approach could prove dicey, Venable suggests. “While I agree with Morningstar’s assertion that any change in a team can alter the decision-making process,” she says, “the problem with these types of studies is that they’re so broad and general that it’s difficult to apply any results to the actual day-to-day management of client portfolios.”
The definition of management change used in the study was a variation of any name listed on official documents supplied by fund companies, says analyst Sargis. “So if there’s someone listed that a fund thinks is qualified to be listed, that’s what we tracked,” she says.
In writing up the results, Morningstar’s analysts inevitably included a few “highly publicized” cases where star managers left – “most notably” Bill Gross leaving Pimco in 2014 and Greg Serruier retiring last year from Dodge & Cox. The report also considered select data relating to fund size and industry tenure of listed managers, according to Sargis.
“When we sliced it more finely, the results were very similar – we found that management changes don’t, on average, affect gross excess returns,” she says.
But applying such a conclusion on a “wide-scale” basis where manager departures are delineated by what names are or aren’t listed on a fund seems a somewhat opaque approach, says Geoff Owen, an advisor at GreerWalker in Charlotte, N.C.
“This is an interesting thesis – I applaud the initiative by Morningstar’s analysts to look into an issue with so many layers,” says the FA at a wealth shop that manages more than $400 million.
But instead of simply noting a change in names provided by fund companies on government filings, Owen and other advisors at the firm see a need to reach out to asset managers directly to help judge the real impact.
“We think it’s important to find out if a departure involves someone in a more junior role or someone with fewer responsibilities,” Owen says.
Another key question he believes is important to investigate after learning of “top line” name changes is how such exits might impact a fund’s research capabilities and access to resources from its corporate parent. Owen says he also likes to question managers about how deep their “farm system” might be as a result of a loss.
“While this study’s point about fund performance is constructive to the overall debate about how important manager turnover is to clients,” he adds, “our own research efforts find it’s crucial to distinguish between who leaves and who remains. It can have a big affect on morale and signal coming changes in a fund’s investment philosophy.”
Andy Kapyrin of RegentAtlantic in Morristown, N.J., characterizes Morningstar’s study as “casting too wide of a net” by “lumping in some big events with some non-impactful events.”
The chief investment officer at the indie RIA, which manages $3.5 billion, adds that his staff focuses on “getting a real good idea of what a fund is trying to do” and then putting manager exits into “a big picture context.”
In particular, Kapyrin says he tries to monitor funds led by star managers “much more rigorously” than those run by large teams.
In that regard, he finds an interesting nugget in Morningstar’s report noting that 75% of actively managed U.S. stock and bond funds are led now by teams. Such a factoid reinforces his observations of a trend where fund complexes are generally trying to “institutionalize” their investment processes.
“As the industry moves to more of a team-based approach, it does make sense that less reliance on individual managers will give actively managed funds a greater ability to maintain consistency in performing against their peers over time,” Kapyrin says.
At the same time, he points out that the analysis of manager changes will likely remain a key value-add for advisors trying to wade through a still-brimming sea of active management investment options.
“When an iconic name like Bill Gross leaves, a lot of people notice,” Kapyrin says. “But even smaller departures that don’t attract attention can be significant events to raise with clients. It boils down to finding out what process and specific discipline the remaining managers are going to try to follow going forward.”