Let's say the person who's run your favorite mutual fund for the past 20 years decides to call it quits. Should you worry? Should you consider selling? Should you do anything at all?
That most likely depends on what sort of fund we're talking about. If it's in one of the giant fund families that run much of the country's retirement assets, it should make little difference. If we're talking about a small, presumably new fund that does more than hug some broad market index, or even a larger fund with a distinctive investing style, a leadership change could matter more.
The typical American invests via a 401(k) plan and probably couldn't say what funds his money is in, let alone who runs the funds. That may be just as well, since the funds that many of us invest in are constrained in so many ways that it rarely matters who's at the wheel.
Fund managers may be more interchangeable than many investors believe in part because they're interested in simple self-preservation. "The bottom line is, they don't want to get fired," says David Snowball, publisher of the Mutual Fund Observer website, which, among other things, tracks fund management changes. Career risk fuels a herding instinct that corrals most fund managers into similar-looking, risk-minimizing behaviors. "What managers try to do is keep their jobs and add some value. For most of them, that's a good thing, right? If they were bold, they'd be disasters, and they know it."
Any big, publicly listed fund company faces a handful of facts that everyday investors would do well to remember: First, the firm's first responsibility is to its shareholders, as opposed to fund holders. Second, over the long haul, most funds aren't going to perform much better or much worse than their competitors, or the broad market. Third, if you're earning a percent of the assets you manage, as many fund companies do, your primary concern is gathering more assets, not increasing that return. Snaring 401(k) sponsors, and keeping them, for example, is a reliable, relatively safe way to do that.
"Most of the Putnams and Oppenheimers of the world that have a mass of purely mediocre funds are just thrilled to death with them," says Snowball, "because they get hired into retirement plans and they never do badly enough to get fired. As long as assets keep coming in the door, nothing else really drives [their] performance."
If that's how the retirement-fund game works, it shouldn't make much difference who's running your fund, because whoever it is will end up in more or less the same place, forced there by the same imperatives. To be sure, there are the inevitable outliers like Peter Lynch (Fidelity Magellan) and Michael Price (Mutual Shares), whose stellar performance makes them icons. But these are exceptions that prove the rule.
There is, on the other hand, a universe of smaller, newer funds where it matters more who's managing what. "The Cook & Bynum fund would not be the same if either Cook or Bynum left," says Snowball, referring to the $82 million portfolio (symbol: COBYX) run by Richard Cook and J. Dowe Bynum, long-term value investors in the tradition of Warren Buffett.
"Small funds and small firms with distinctive strategies … are often driven by the insights, the experience, the intuition of an individual manager," says Snowball. "There is a role for active management, and interesting asset-allocation strategies are a place where active managers can make a difference."
When you need to know who runs your money, where do you look? The "statement of additional information" accompanying the fund prospectus is a place to start. It discloses the manager's compensation and his or her other activities. You might find that, in addition to managing your fund, he or she is managing private accounts many times larger than your fund. "As you look at it, you can suddenly find how terribly minor you are in the fund manager's universe," says Snowball.
One particularly critical question the statement will answer: Do your fund managers eat their own cooking? In other words, are they willing to put their own money behind the investment choices they make for you? Morningstar research shows that manager-owned funds do better than non-owned funds.
Says Snowball: "If your money is at stake, you act differently."