Finding the right manager

NEW YORK – A good mutual fund manager can achieve rock star status in financial circles. Consistently high returns that manage to beat the market can propel a manager to investment fame, with cover stories in personal finance magazines and punditry opportunities on television.

So what happens when the star leaves?

Even if a given mutual fund manager isn’t in that league, his or her departure can change the strategy and philosophy of the fund’s investments. The vast majority of mutual fund investors don’t even know how their funds are managed, let alone who’s in charge. But management plays an important part in any mutual fund, and savvy individual investors make themselves aware of any changes.

“The individual investor is putting their trust in that fund family and in the portfolio manager in that fund family,” said Dian Vugovich, publisher of Allaboutfunds.com, a mutual fund education Web site.

There are two basic kinds of management at most mutual fund companies. Team-managed funds still have a lead manager, but decisions are made as a group, with individuals coming to consensus on strategy and investment ideas. Even when a lead manager leaves that particular fund, the team’s philosophy and strategy tend to remain constant. Most large funds are managed by teams.

Other funds are dominated by one individual – the star system. That top manager has final say over all investment strategies and activities. When such a manager is replaced, the fund’s strategy and investment philosophy can undergo a major change. Star managers tend to run smaller funds with very specific strategies and investment goals, such as a high-yield fund or a sector-specific fund.

“The difference between team-managed funds and individuals can be important,” said John Markese, president of the American Association of Individual Investors.

So what happens to a fund when the management changes? That depends on how well the fund’s been performing under the old manager. A poorly managed fund that switches leaders can be a positive for an investor, since the fund company has probably replaced an ineffective manager.

But the loss of a star manager in an outperforming fund isn’t necessarily a bad thing, either. While some funds have difficulty in maintaining their growth after a top manager leaves, a study by fund tracker Morningstar Inc. showed that approximately half of all mutual funds maintain their performance when management changes – for better or worse.

Fund analysts said it takes about a year at minimum to determine whether a new fund manager is successful. During that time, investors should not only compare a fund to its benchmark, but also to its peer group of other funds. Even if the fund loses ground, there may be no need to get out of the fund if its peers have likewise underperformed – there could be market forces that account for the loss.