Course 209: Why Knowing Your Fund Manager Matters
Where Managers Matter Most--and Least
In this course
1 Introduction
2 Different Manager Structures
3 Why Managers Matter
4 Where Managers Matter Most--and Least

If you're looking for new investments and find two equally good funds, choose the one with the more experienced manager. But if the manager of a fund you already own jumps ship, it's not always best to sell the fund immediately.

First, you may have to pay taxes on your sold shares, if they gained in value, and what you give up in taxes may not be offset by extra future gains in a different fund. Second, the new manager may do just as well as the old. Finally, some types of funds are simply less affected by manager changes than others. Here are some examples:

Index Funds. Managers of index funds are not actively choosing stocks, but simply mimicking a benchmark by owning the same stocks in the same proportion. As such, manager changes at index funds are less important than manager changes at actively managed funds.

Funds in Categories with Modest Return Ranges. Managing an ultrashort-bond fund is a game of basis points. (A basis point is one one hundredth of a percentage point.) In other words, because ultrashort bonds don't offer much return potential, the difference in return between a great and an awful ultrashort-bond fund is a matter of one or two percentage points. So if your ultrashort-bond fund manager leaves, it's probably not a big deal.

Funds from Families with Strong Benches. When a fund manager leaves T. Rowe Price, we generally don't get very upset. Why? Because T. Rowe has many talented managers and analysts who can pick up the slack. Manager changes aren't quite as troubling if you're talking about a fund from a family, such as Fidelity, T. Rowe Price, and American, with a number of good funds and a strong farm team.

Funds Run by Teams. While this isn't always the case, you'll often find that funds run by teams are less affected by manager changes than funds run by only one person. But that's only true if the fund really was run in a team fashion, in which decisions were truly democratic.

Conversely, then, manager changes can be a crushing blow to other types of funds. Investors who disregard managers and manager tenures in the following types of mutual funds may find themselves much worse off than a disappointed sports fan.

  • One-manager funds.
  • Funds run by very active managers who've proved to be adept stock-pickers or traders.
  • Good funds from families that aren't strong overall, or from fund families that lack other strong funds with a similar investment style.
  • Funds in such categories as small growth or emerging markets, where the range of possible returns is very wide.

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