What if your fund manager quits?

So social media is abuzz* that someone called Kenneth Andrade is quitting IDFC amc (update: now official). To be frank, I had no clue who he was, until I saw an AIFW post. When I googled his name, I then remembered seeing his interview at VR and that he is the manager of IDFC premier equity.

Perhaps I did not about him because I have no IDFC holdings, but besides Prashant Jain and Rajeev Thakkar, I cannot name any of my fund managers. Thank god for that. One less thing to worry about.

So, what if my fund manager quits? I honestly don't know what the big deal is.

Fund managers are like any other corporate employee. If they don't like their work environment, or if someone else offers them a better pay or whatever reason, sooner or later they are bound to jump ship.

I do not have statistics, but I will willing to wager that the average fund manager tenure is something close to 5-7 years.

Why should I quit my holdings just because my 'star' fund manager has quit.

Fund manager changes are quite common. It is only when the so called 'stars' quit there is a lot of buzz (hey it helps media ad revenue).

Who creates these stars? Is it the media? The distributors? The investor community, or is it the fund house themselves?

Perhaps all of them contribute. The fund houses play a role too by asking fund managers to offer interviews and featuring for promotions.

Therein lies the problem. If an individual is promoted as the face of a fund management team, investors are always going to worry (I am no different, which is why I choose not know who the manager is) if he/she quits.

When Rajeev Thakkar faced the prospect of being jailed for being involved in the accident that killed Parag Parikh, investors (incl. a few freefincal readers) were quick to say, "it is time to quit".

The amc should focus on promoting the process  and not the person. I remember Parag Parikh saying Rajeev is called as the little WB during the Chennai unit holders meet. That sends out the wrong message to the investor.

I think investors should not be worried about who the fund manager is, and focus on the investment strategy. Whether it is managed by Tom, Dick or Harry, it is the AMCs job to ensure the fund sticks to its strategy.

Perhaps easier said than done. Anything can happen, if a star quits:
1) things may remain as is

2) performance may drop

3)  or pick up

Whatever happens, it will show up in the NAV movement (not NAV value). I base my decisions on the NAV movement only. Good or bad, it will show there.

If I don't like what I see, I will quit, irrespective of who manages the fund.

Should we look at the tenure of a fund manager while selecting a fund? Hard to say, yes or no. The manager can quit the day you buy units!

In fact, if you want to look at who the fund manager is, consider a consistent performer where the manager has changed multiple times in the past. That is perhaps a sigh that the AMC is strong enough to focus on investment strategy instead of an individual.

So even if Kenneth Andrade is indeed quitting, why not 'do nothing', except keep an eye on performance. Who knows it might even improve!

Update 2: It is now official. He has quit.

http://www.cafemutual.com/News/Kenneth-Andrade-quits-IDFC-Mutual-Fund-~3903~New~AMC~23

*Update: This post only deals with how investors react on the news or rumour of a fund manager's exit.  The buzz mentioned above stems from (besides AIFW)

https://mobile.twitter.com/NagpalManoj/status/610660768942460928?p=v

and

http://epaperbeta.timesofindia.com/Article.aspx?eid=31818&articlexml=HEARD-on-the-Street-16062015011006

I have no information on said fund manager's careers plans.  As mentioned in the post, I don't care. This post is to urge that, neither should you.

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56 thoughts on “What if your fund manager quits?

  1. gunda

    When investing in a company, one always looks at how the management is managing the company. If we only rely on stock value of the company would we be fine? I guess not. Isn't this similar....

    Reply
    1. freefincal

      If you to wish to think so. If the management of the stock I hold changes, I wont sell just because of that. I invest in a mutual fund for its strategy and not for an individual.

      Reply
  2. gunda

    When investing in a company, one always looks at how the management is managing the company. If we only rely on stock value of the company would we be fine? I guess not. Isn't this similar....

    Reply
    1. freefincal

      If you to wish to think so. If the management of the stock I hold changes, I wont sell just because of that. I invest in a mutual fund for its strategy and not for an individual.

      Reply
  3. Suman

    I do agree that change in the Fund Manager is not a necessary condition to exit out of a fund but then if you are tracking your fund and realize that it is suddenly not performing well inspite of the market doing well you can probably attribute the non-performance to the change in FM if there was any. And sometimes the FM's do become the face (and the brain) of the AMC so an exit may cause some change in strategy with a new guy coming in. My two cents....

    Reply
    1. freefincal

      If you can objectively analyze a fund and conclude that it is not doing well, does it matter why? Is it so easy to place the finger on the fund managers exit? Personally, I would be busying chooing a replacement.

      Reply
  4. Suman

    I do agree that change in the Fund Manager is not a necessary condition to exit out of a fund but then if you are tracking your fund and realize that it is suddenly not performing well inspite of the market doing well you can probably attribute the non-performance to the change in FM if there was any. And sometimes the FM's do become the face (and the brain) of the AMC so an exit may cause some change in strategy with a new guy coming in. My two cents....

    Reply
    1. freefincal

      If you can objectively analyze a fund and conclude that it is not doing well, does it matter why? Is it so easy to place the finger on the fund managers exit? Personally, I would be busying chooing a replacement.

      Reply
  5. Paul

    Compared to the excellent articles I have been receiving in my mailbox over the past few days, this one is really disappointing. It is based on a whole lot of nothing as the author himself states that he doesn't have any data to back it up.

    The IDFC news is disconcerting to many, including me, because IDFC as well as various finanical dailies have written many articles on Andrade's deft management of the Premier Equity Fund. The fund was performing poorly, then it opened for subscription after many years and was just regaining its spot. Andrade's exit now brings in a lot of uncertainty and I am definitely worried about it.

    PS: BTW, Thanks for informing about his exit as I was unaware. IDFC has not sent any mail on this matter yet.

    Reply
    1. freefincal

      I only said social media is abuzz. There is no official confirmation of his exit. See the last line of the post (before the update). It is precisely to address reactions such as yours that I wrote this post. If you do not recognise the rationale behind objectively analyzing fund performance irrespective of who manages, so be it. It is statistically impossible for everyone to like what I write. Not going to lose sleep over it. The 'no-data' refers only to avg fund manager tenure across the industry. I had mentioned that this post stems from a thread at AIFW (asan ideas for wealth, fb book group).

      Reply
  6. Paul

    Compared to the excellent articles I have been receiving in my mailbox over the past few days, this one is really disappointing. It is based on a whole lot of nothing as the author himself states that he doesn't have any data to back it up.

    The IDFC news is disconcerting to many, including me, because IDFC as well as various finanical dailies have written many articles on Andrade's deft management of the Premier Equity Fund. The fund was performing poorly, then it opened for subscription after many years and was just regaining its spot. Andrade's exit now brings in a lot of uncertainty and I am definitely worried about it.

    PS: BTW, Thanks for informing about his exit as I was unaware. IDFC has not sent any mail on this matter yet.

    Reply
    1. freefincal

      I only said social media is abuzz. There is no official confirmation of his exit. See the last line of the post (before the update). It is precisely to address reactions such as yours that I wrote this post. If you do not recognise the rationale behind objectively analyzing fund performance irrespective of who manages, so be it. It is statistically impossible for everyone to like what I write. Not going to lose sleep over it. The 'no-data' refers only to avg fund manager tenure across the industry. I had mentioned that this post stems from a thread at AIFW (asan ideas for wealth, fb book group).

      Reply
  7. Raghavendra

    Good post. Most AMC's will have a process driven philosophy towards stock selection, investments and redemptions for a fund. Over an average of 5 - 7 years of the fund managers' tenure, i fully agree with your thought. But if the fund manager has been with the AMC for ~ 10 years (which is Kenneth's tenure at IDFC), it could have some redemption effect or flight of capital. While it may not have anything to do with the process, personal branding could play a part here, given the behavioral aspect of human kind :). Imagine Prashant Jain/S Naren moving to a new AMC. These names alone could pull in crores in AUM 🙂

    This is not to say that a fund's performance is 'entirely' dependent on the fund manager, but is about the way we think. Think investment in LIC Nomura MF for example - not many would even touch from a barge pole, no?

    Reply
  8. Raghavendra

    Good post. Most AMC's will have a process driven philosophy towards stock selection, investments and redemptions for a fund. Over an average of 5 - 7 years of the fund managers' tenure, i fully agree with your thought. But if the fund manager has been with the AMC for ~ 10 years (which is Kenneth's tenure at IDFC), it could have some redemption effect or flight of capital. While it may not have anything to do with the process, personal branding could play a part here, given the behavioral aspect of human kind :). Imagine Prashant Jain/S Naren moving to a new AMC. These names alone could pull in crores in AUM 🙂

    This is not to say that a fund's performance is 'entirely' dependent on the fund manager, but is about the way we think. Think investment in LIC Nomura MF for example - not many would even touch from a barge pole, no?

    Reply
  9. A.Sundaram

    PJ,SN,KA are all acknowledged and successful fund managers and even if the funds managed by them perform badly during certain phases,we can be fairly confident that they would come back strongly-sooner or later.For instance if KA continues to manage IDFC PEF and its performance slips,I would not be unduly concerned since we know that he is good at his job.But if he has quit(as the grapevine claims) and the performance slacks,we cannot sit back with the hope that things will eventually work out-it may but the wait would be tortuous.

    Reply
    1. freefincal

      I am not suggesting anyone should sit back and wait. A change in manager does not mean the performance will immediately drop. I am only saying that one need not exit immediately after the manager steps down.

      Reply
  10. A.Sundaram

    PJ,SN,KA are all acknowledged and successful fund managers and even if the funds managed by them perform badly during certain phases,we can be fairly confident that they would come back strongly-sooner or later.For instance if KA continues to manage IDFC PEF and its performance slips,I would not be unduly concerned since we know that he is good at his job.But if he has quit(as the grapevine claims) and the performance slacks,we cannot sit back with the hope that things will eventually work out-it may but the wait would be tortuous.

    Reply
    1. freefincal

      I am not suggesting anyone should sit back and wait. A change in manager does not mean the performance will immediately drop. I am only saying that one need not exit immediately after the manager steps down.

      Reply
  11. Shyam

    If it is a team game, how come funds with the same mandate within the same MF house differ so much in terms of returns? Even within IDFC, the premier equity fund is a star performer way above the rest, why this outperformance? A fund manager is highly responsible for his fund and his style of investing makes a lot of difference to the returns. For example, if thr are two funds with a mandate for large caps. One manager picks RIL as a major holding, while other picks HDFC BANK. We know who wld have performed better ovr the last 5-10 years. It is not a team game as u mentioned.

    Reply
    1. freefincal

      Certainly possible. Which is why I choose not to look at individuals before investing. It is less stressful for me to base my decisions on NAV movement alone.

      Reply
  12. Shyam

    If it is a team game, how come funds with the same mandate within the same MF house differ so much in terms of returns? Even within IDFC, the premier equity fund is a star performer way above the rest, why this outperformance? A fund manager is highly responsible for his fund and his style of investing makes a lot of difference to the returns. For example, if thr are two funds with a mandate for large caps. One manager picks RIL as a major holding, while other picks HDFC BANK. We know who wld have performed better ovr the last 5-10 years. It is not a team game as u mentioned.

    Reply
    1. freefincal

      Certainly possible. Which is why I choose not to look at individuals before investing. It is less stressful for me to base my decisions on NAV movement alone.

      Reply
  13. kalyan

    I agree with you that the manager is not that important. If you are a DIY investor, you would have a strategy. Either self developed or one of the ways from the many approaches this blog suggests. In that case the fund manager is irrelevant. If a FM changes, your method will raise a red flag if the manager is not performing after giving sufficient time to him. It works the other way too. If some fund fires a bad one and gets a good one, the fund will start popping out in your short lists after a reasonable time given to the new manager. In fact even after 5,6 years of investing I did not know the name Prashanth Jain till recently but was investing in his funds always as his funds are doing well.

    Reply
  14. kalyan

    I agree with you that the manager is not that important. If you are a DIY investor, you would have a strategy. Either self developed or one of the ways from the many approaches this blog suggests. In that case the fund manager is irrelevant. If a FM changes, your method will raise a red flag if the manager is not performing after giving sufficient time to him. It works the other way too. If some fund fires a bad one and gets a good one, the fund will start popping out in your short lists after a reasonable time given to the new manager. In fact even after 5,6 years of investing I did not know the name Prashanth Jain till recently but was investing in his funds always as his funds are doing well.

    Reply
  15. N S Raghavan

    What if the performance of IDFC PEF actually improves after (and if ) KA leaves ..it will go to show that the management process is very strong, and we actually get more confidence in the other IDFC funds. The IDFC AMC management (or the team in charge of the investment stratagy) will not look good if it does not have a back up to take up the reins of PEF to maintain the performance as KA did. Either way, the management will be aware and their committment will eventually show up in the performance (up or down)

    Reply
  16. N S Raghavan

    What if the performance of IDFC PEF actually improves after (and if ) KA leaves ..it will go to show that the management process is very strong, and we actually get more confidence in the other IDFC funds. The IDFC AMC management (or the team in charge of the investment stratagy) will not look good if it does not have a back up to take up the reins of PEF to maintain the performance as KA did. Either way, the management will be aware and their committment will eventually show up in the performance (up or down)

    Reply
  17. MRHDK2012

    Pattu,

    I am a regular reader of your blog and like your posts. I am thankful to you as your posts are beneficial to many of us.

    However, at times you seem to be taking extreme views. I wonder if your view is narrow as you have worked only in academic world and has not worked in business /corporate world.

    I don't want to get into specifics of Kenneth and IDFC Premier Equity. However, in any business (small or big); quality of people is a major differentiator of success. People decide the rise /fall and growth of enterprise. I agree on the importance of processes. However, it is individuals who define those processes and those individuals matter for the success.

    At times, your comments are coming across as demeaning to certain sections of investment world. You need to take holistic view of the situation and try to understand why certain players are required in value chain. You are a big proponent of DYI. (I am myself of DYI). But we need to understand and appreciate that everyone can't do that. It requires certain knowledge, training and flair for investing. It's not everyone's cup of tea and people need handholding.

    Hope you will take my comments in right spirit.

    Reply
    1. freefincal

      Saying that one should not take knee-jerk actions but must wait and watch is an extreme view?! Of course everyone can't DIY. I have mentioned it often enough that such people should seek professional help. What has that got to do with this post?!

      Reply
  18. Shyam

    Weird logic u guys r using. Two funds are the best in the whole family( far ahead of the rest) and those two are managed by one guy. So this is just coincidence and his style has no direct relation with the fund performance? If the AMC management were so adept, why were the other funds lagging till now, any answers?

    Reply
    1. A.Sundaram

      It's a fact that KA was the face,identity and the man behind the success of IDFC-there was truly no second line of defense.Dabbling in small and mid-caps is like skating on thin ice but KA had mastered the art(in one of the meetings he had outlined how he goes about constructing the portfolio-it had less to do with a strict corporate process but more to do with personal choices).Such FM changes esp. in the mid-cap space have to be closely followed by investors who have a significant exposure and corrective action taken,if necessary-it has to necessarily transcend mere academic discussions.

      Reply
    2. freefincal

      My logic does not depend or revolve around fund managers, for avoiding the very concerns voiced here. Maybe weird for you, but it has worked pretty well for me.

      Reply
  19. Kunal

    It's a load of BS to say that a fund manager quitting does not make a difference. Fund Management is as much an art as it is a science. Its all very good to say that a firm has processes that leads to performance but that is only in theory in most cases but a few. In a bull market, a well created portfolio left unattended will result in continued outperformance for a few years after the FM has quit.When you see the outperformance you will reach the wrong conclusion that the FM leaving has not made an impact when in fact it is because the FM made a high quality portfolio that you got the outperformance. When the ideas in the portfolio run their course over the next couple of years, will you start to witness the performance dropping. So the right thing to do in a case like this is to immediately trim your overweight position to the fund down to a neutral position. In this particular case, the position would have to be largely withdrawn over the coming year as absent Kenneth, once the current portfolio runs its course, it will likely start to underperform as for the moment at least theres no one of KA's calibre to continue ideating picks for the portfolio. For me once a new FM takes over, he will have to prove himself like any other FM before he gets my money.

    Reply
    1. freefincal

      Before you start yapping, do understand what is being said. No one is saying that 'change in fund manager will not make a difference' Perhaps what investors should fear is extreme opinions and actions leading to out-flow issues for the amc than the actual exit of the fund manager, which bytw is now confirmed.

      Reply
  20. Kunal

    At least let us be clear and crisp in what our view is rather than hedging our bets. Please read carefully what I said - at any point of time, one has to take a decision with a given set of information.If I had an above average allocation to the fund because of KA, the right action for the moment is to cut the allocation to an average weight wherever the tax impact is Nil, the logic being, there is no immediate panic as his portfolio created over the past will continue to perform in the near future which gives one time to recalibrate but there is no doubt that the recalibraion is required.Wait and watch means there is lack of clarity of thought and I am living on hope rather than taking a decision with the changing variables.

    Reply
  21. DEEPAK

    In a sample study of 3,946 active US equity mutual funds spanning the period from
    1992 to 2007, Bessler (2012) has shown that for high performing funds, high inflows have a stronger negative impact on long-term performance than the manager change,

    If I extend the logic of exiting a fund due to fund manager change to the a/m study, I will not be able to invest in all the "darling" funds of Indian investors 😉

    Reply
  22. Prasad

    I have been watching portfolio management of Prashant Jain from the time he was with Zurich Mutual, I value his concepts on importance of capital preservation, and the undue return demands in percentage terms in case of loss of capital. Yet I have quit from his funds a couple of years back based on performance and alpha fidelity which per se appeared to be from Fund size in the hindsight. Again I maintained to stay put in Magnum Equity and Magnum Global put when one time SBIMF Ace fund manager Sandip Sabharwal quit, observed the performance more closely and decided to quit an year after the event based on change of the funds market behaviour in terms of both risk and returns. The point of my observation I learnt is that Fund performance behaviour doesnt show up immediately even if fund manager quits and persists for sometime and may even improve in some cases which I observed. Again even though different fund portfolios show similar stocks, the day to day positions, F&O trends and price points of their purchase and sale varies based on fund policies and fund manager style of functioning within the overall limitations imposed by the mutual fund house, make all the difference.

    To summarise all one needs to do in case of Star Fund manager changes is to observe the performance metrics more closely and make a call after observing for at least a couple of quarters.

    Reply
  23. Prasad

    Infact I have entered Andrade's funds during Standard Chartered MF regime and ultimately exited all of his funds three years back except Premier Equities Fund. That also I had exited a year back, due to drop in consistency, which is somewhat unreasonable to expect from a Mid and Small cap fund, and Kenneth Andrade's well anticipated and timely picks in small and mid cap funds that attracted me to his style and stayed put for a long time just for the fact that his portfolios had better market resilience in Small and MidCaps even though return have reduced overall in comparison to its competitors. Ultimately I have been remaining invested for a very long haul of over 20 yrs, so many of these variations get evened out in the long run,even if I stay put after a couple of quarters with poor performance. I came to this conclusion with my investments in Pioneer Bluechip and Prima funds in late Ninties, which I exited later for some reasons and now if I analyse their behaviour, i find I would not be too deviated in performance even if I had stayed put with them.

    To summarise, One need to develop a very very long view on fund investments to benefit from them. The Golden Rule I learnt in my 25 yrs of investment since the very first private sector mutual fund of Vivek Reddy's Kothari Pioneer, is that; the amount of time the investment stays put in the market matter much much more than the timing of the market and cycles.

    Reply

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