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What do you do when a manager leaves?

Ten things to look for when your portfolio manager leaves.

Wednesday, May 16th 2001, 3:29PM
Frank Russell Company is dedicated to the research and assessment of investment managers in order to discover those with rare and special talents. Over the years, they've learned that there are several things to consider when a "star" portfolio manager leaves a fund manager.

Edward Smith, director of leading fund manager Frank Russell Company (NZ) Limited, says, "The most important thing for you to remember is that a portfolio manager's departure does not warrant a snap decision one way or another. The most effective response will come with a combination of research, perspective and time."

Here are Edward Smith's top ten tips on what to look for when your portfolio manager leaves:

1. Was the "star" truly the one generating the returns? In many cases, the star is backed by a legion of talented but anonymous analysts who provide the bulk of the insights-and may very well continue to do so even after the star's departure.

2. Does the fund's performance reflect mostly the departing manager's individual brilliance or the fund's investment process? Often the fund's investment process is what really adds the value, and can continue to yield good results long after a "star" leaves.

3. What caused the departure-was it an isolated case or part of a pattern? Even stars lose motivation, have personality clashes, or seek new challenges. That's just human nature. But if the departure heralds a spate of further departures, or comes on the end of previous departures, there may be a more endemic problem. Given that the successor will likely face the same problems, it makes a lot of sense to consider taking your money elsewhere.

4. Who will replace the departing manager and what do you know about the replacement? Many firms groom successors to their star managers. If the replacement comes from within the organisation, there is a better chance that the fund's investment process will not change dramatically after the star departs.

5. What changes is the new manager planning-if any? A manager can have a lingering impact on a portfolio long after his or her departure, especially if the successor is slow to make significant changes to the portfolio.

6. How costly will it be to move your money elsewhere? Will you be selling your investment at a loss? Will you face a potential tax liability? Does the fund you're thinking of shifting into charge an entry fee? Keep in mind that you also risk being "out of the market" while you make the transition from one fund to another. Consider whether the potential benefits outweigh the costs.

7. Have you considered all the implications of the shift? A manager's departure doesn't necessarily mean a fund's performance will go into a decline. Russell's research in markets around the world has found that there is no hard-and-fast rule when it comes to manager transitions: Sometimes a fund's performance does indeed decline following the departure of a "star" portfolio manager, but sometimes it remains consistent-or even improves.

8. Does the successor's philosophy or style suit your objectives? He or she may trade much more actively or shift the fund's focus. Investors can watch for significant changes in fund holdings or portfolio turnover rates, but changes like this can be difficult to monitor. Some investors may simply need other investment alternatives.

9. Is the departing manager just one among several in your portfolio? We encourage all our clients to diversify their assets among different managers and investment firms to help reduce the risk of any one manager leaving.

10. Are you thinking about the shift in the bigger context of your portfolio? Sell discipline is often the factor that separates average investors from truly successful ones. Many people can recognise a good buy when they see it. But few know when to sell-and that includes fund investors. For your sell discipline to be effective, you must maintain perspective when one of your portfolio managers leaves.

Frank Russell Company, a global investment services firm, provides multi-manager investment products and services in more than 35 countries, and has been researching money managers for more than 30 years. Worldwide, Russell manages approximately NZ$150 billion in assets, and advises clients representing around NZ$3 trillion. Founded in 1936, Frank Russell Company is a subsidiary of Northwestern Mutual and is based in Tacoma, Washington, USA with additional offices in New York, Toronto, London, Paris, Amsterdam, Singapore, Sydney, Auckland, Tokyo and Johannesburg.

In New Zealand, Frank Russell Company (N.Z.) Limited advises on more than NZ$12 billion in assets, and invests around NZ$1.3 billion for New Zealand investors in Russell Funds.

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