On the day super stockpicker Peter Lynch announced his retirement as head of the $13 billion Fidelity Magellan Fund, the giant investment firm stood ready to shoot money back to worried investors as fast as water out of a fire hose.
Magellan`s cash stood at an all-time high of $1.8 billion, and Fidelity`s back room was braced with extra squads of telephone operators awaiting redemption calls.
To Magellan`s surprise, the phones didn`t set off alarms that week. Of investors who did call, more than two-thirds just wanted some more information about Lynch and his replacement, Morris Smith, who is stepping into Lynch`s gunboat-size brogans.
Lynch`s departure focuses attention on the tricky and delicate art of manager-watching. The root question: If your fund is doing what you want it to do and has done it for years, should you care who`s running the show?
”You bet,” says Ken Gregory, editor of the L-G No-Load Fund Analyst, a monthly newsletter. And you need to know more than just the portfolio manager`s name and phone number. A mutual fund investor also needs to know when management changes occur; when fund managers are key players and when they aren`t; and how to react to change when it comes.
It`s tough to track personnel switches because mutual funds aren`t required to tell you much about portfolio managers and management shifts. That situation might change. A proposed Securities and Exchange Commission rule would require funds to disclose the name, title and business experience over the last five years of people who ”make key investing decisions”-mainly portfolio managers. The rule would also require funds to alert shareholders of a change in key investment personnel, so you`d be informed by mail if your portfolio ace left.
If your fund literature is skimpy on fund-manager facts and you`re worried your nest egg is in the dubious care of some newly incubated MBA, try calling the fund and requesting biographical information. Most funds should give you the name-rank-serial-number basics regarding your portfolio manager. Contrary to what you might think, funds tend to perform better after a personnel change. Changing Times examined 61 stock funds that changed portfolio managers in 1988, comparing before and after total returns two ways: relative to Standard & Poor`s 500-stock index and relative to funds with similar investment objectives.
In 1987, before switching managers, those funds as a group underperformed the overall stock market, posting a 2.3 percent total return compared with the S&P 500`s return of 5.2 percent. In 1989, the funds with new managers registered an average total return of 25 percent, compared with the S&P 500`s gain of 32 percent. That`s still below par, but a lot better.
Similarly, the funds tended to perform better against their peers after switching portfolio managers. Measured by total return, the typical fund went from the 56th percentile in its fund group in 1987 (slightly below average) to the 47th percentile in 1989 (slightly above average).
Don Phillips, contributing editor of Mutual Fund Sourcebook, is not surprised that many funds do better after a manager change. ”Sure, there are the Peter Lynches who leave,” Phillips says, ”but more often there`s a change because someone was fired for not doing a good job.”
Some funds put a high premium on creative, day-to-day investing and some don`t. You need to know the difference. At one extreme is the index fund, whose manager merely mimics the composition of the S&P 500 or a similar index. A golden precept: The greater the fund`s freedom to invest, the more important the investment decisions and, potentially, the portfolio manager. Look for the rules of the road in the fund prospectus, which spells out the policies that portfolio managers must follow when investing.
An even better indicator of investment activity and the manager`s importance is the annual portfolio turnover rate, or how often the securities are bought and sold. This number is included in fund financial statements. A rate of 200 percent means two complete changes in the composition of assets and suggests the manager`s role is quite active. A turnover of 20 percent or less indicates the manager may not have enormous impact; investment decisions perhaps reflect a highly structured or long-term investment philosophy.
What happens when the fund you like has a new and unfamiliar hand at the helm? ”Should you sell just because there`s change, like with Magellan?”
says John Markese, research director for the American Association of Individual Investors. ”That`s silly stuff. If it`s doing well, you shouldn`t care if a monkey`s managing it.”
It takes at least six months for a new manager to make much impact. Take that time to investigate two questions:
Does the fund depend on creative, ongoing investment decisions and tend to have a high portfolio turnover?
Is there something unique about the outgoing manager that will be missed? If the answers are no, wait and see what happens. If yes, says A. Michael Lipper, of Lipper Analytical Securities Corp., ”The manager is something to look at.”
