Sunniva Kolostyak: Welcome to Morningstar. When a fund manager changes companies, should you follow them? This is a question our manager research team has been asking, and today I’m joined by Mathieu Caquineau, who will share the findings from their most recent study. So Mathieu, thanks for being here. Why does it matter if a fund manager changes jobs?
Mathieu Caquineau: Well, fund managers moving to a new firm happens constantly in the industry. Portfolio managers are often poached by a competitor or they launch their own firm. It matters a lot because that leaves investors in a difficult situation, right? Should they follow their manager to their new firm, what are the odds that these managers are going to replicate their past investment success? And that’s how we came up with the idea for this research. And so to answer this question, we looked at historical data going back to the 90s in the US and the early 2000 in Europe. And we’ve identified manager switching firms and we’ve tracked how they performed before their departure and after they left.
Kolostyak: What did you find? Did they do better or worse in their new role?
Caquineau: Well, in the first few years, after their fresh start, fund managers often do very well. We see a significant uptick in average alpha from the old firm to the new firm, looking at the three-year period, so we’re looking at the last three years at the old firm and then first three years at the new firm. And, there are incentives for both the asset managers and the portfolio manager to show good results rapidly. So, the new firm is likely to provide resources and support to make the transition a success. Looking at the data, we also found that managers manage less money at the new firm. So that will likely also help them to outperform, but a more – a strong explanation though, is that these managers are likely still surfing on the successful investment style that led them to be hired in the first place.
Kolostyak: So what does this then tell investors, should they stick with the old fund, or would it be profitable for them to then follow the manager in their new fund?
Caquineau: Well, first we we see that the fund managers who leave their firms are typically good performers, right. They tend to perform also very well shortly after they move. So that would argue in favor of moving with the manager, but the issue is that fresh start effect doesn’t last very long, when we extend the observation period beyond the first three years we see that the excess return starts to decay and actually when looking at the performance of the full tenure of the manager at his old firm and then at his new firm, we see that he has delivered much less alpha at the new firm compared to what it had achieved previously. So investors, should be cautious, not build very high expectation. That said, we’ve seen a few managers who’ve made a long term successful transition, but only looking at past performance is clearly not enough to increase your chances of making the right move as an investor.
Kolostyak: So do you then have any tips for investors if they are considering to make a switch?
Caquineau: First, take your time to assess the situation, often there is no rush to make that decision and then you should look at alignment of investment philosophy between the old and the new firm. You should look at the support and the resources that the manager is going to get at the new firm is that sufficient for him to run the funds properly. I think the cultural aspect is also important, asset managers with good stewardship practices generally have better foundations to make that transition a success. And lastly, fees are critical, no matter how talented the portfolio manager is and how well the transition looks from the get-go. If fees are too high at the new shop, then investors are likely to lose in the long run.
Kolostyak: Well, Mathieu, thank you so much for being here today. For Morningstar I’m Sunniva Kolostyak.
