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A Manager-Change Checklist

Manager hit the road? 7 questions can help you determine next steps.

Christine Benz 03/10/14

Email inboxes around the financial-services industry--and even outside of it--started to blow up on Friday morning, as news made the rounds that longtime Bill Gross was moving to Janus Capital to run a small, new-ish bond fund.

Gross' departure spurred a raft of questions, including who would take over for him at PIMCO Total Return, whether Gross jumped to another firm or was pushed, and whether investors would follow him to Janus. For the many investors who own PIMCO Total Return, the decision is more personal: What should I do?

Here's a checklist to use to ensure that you make a well-considered decision.

1. Will I incur transaction costs if I sell and/or buy something else?
Your first consideration when determining whether to sell a fund following a manager change is your economic position and how a trade might affect it. If you'll face either tax or transaction costs to make a change, consider them your "hurdle rate"; the investment you swap into will need to beat those costs for you to break even.

2. Is the fund actively managed or does it track an index?
This is an easy one. Because tracking a market benchmark tends to be much more science than art, a manager departure at an index fund is usually a non-event. As long as everything else about the index fund is staying the same--the expenses it charges, the index it tracks--investors have no reason to worry if the person managing the portfolio changes. By contrast, a manager change at an actively managed portfolio could have meaningful repercussions for performance.

3. Is the fund tightly constrained or more free-ranging?
Even if your fund is not an index fund, a manager change isn't likely to be a big deal if it employs a tightly constrained strategy. Most of Vanguard's actively managed bond funds are a good example: Their managers stick pretty closely to their benchmarks; the goal is to let low expenses, rather than fancy footwork on the part of managers, differentiate their returns from their peers. PIMCO Total Return, by contrast, was a highly idiosyncratic portfolio under Gross, with the latitude to veer significantly from the Barclays Aggregate Index, for better and for worse. A manager change at such a fund is more significant, and more concerning, than one at a fund with a more vanilla strategy because it could be difficult for the new manager to replicate the more idiosyncratic strategy.

4. Could a cult of personality trigger redemptions?
This question will tend to follow from the preceding one. If your fund manager employed a highly idiosyncratic strategy and was successful at it, other investors may feel a sense of loyalty. That could prompt them to sell in the wake of a manager departure because they assume the new skipper won't have the same 'secret sauce' that the prior one did. If enough investors dump their shares, that can start to have implications for the way the portfolio is managed. The new manager may be forced to dump securities that he or she would have preferred to hang on to, settling for lower prices than would be ideal. Such forced selling is a particularly big risk if the manager traffics in less-liquid securities where there's not a huge pool of buyers on a given day, such as tiny-cap stocks or exotic bond types. Selling shares into an unwelcome market could mean the new manager will have to settle for lower and lower prices. Alternatively, the manager might maintain a larger-than-average component of liquid assets to head off such a risk. The downside, however, is that doing so will mute any gains that occur in the fund's asset class while this is going on.

5. Do the successors have a proven track record?
Even if your manager had great success with a unique style, all might not be lost if he or she worked closely with analysts or comanagers who are steeped in the same style and will be stepping in as successors. A best-case situation is unfolding at  T. Rowe Price Equity Income (PRFDX) right now. Although longtime manager Brian Rogers will step down in October 2015, his successor, John Linehan, is already working alongside him. Linehan also delivered strong results at another, similarly styled fund,  T. Rowe Price Value(TRVLX). Succession strategy doesn't always unfold so elegantly, unfortunately.

6. What's likely to change?
Even if you're satisfied that the new manager is experienced, it's still worth assessing what might be different about the fund once he or she takes over, and whether that could affect its role in your portfolio. Was the new manager the firm's lead emerging-markets analyst before taking over, and will he or she, as a result, give such names greater emphasis in the portfolio? Is a management team taking over for a solo manager? This could have the effect of reducing the fund's positions in individual names.

7. Are there worthy alternatives?
If you're leaning toward selling, it's worth spending some time acquainting yourself with substitute funds. If your former fund manager employed a style that's difficult to replicate in-house, chances are you'll be hard-pressed to find good substitute funds outside of that shop, too. 

About Author Christine Benz

Christine Benz  

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.