What impact does a change of fund manager have on mutual fund performance?
Analysis of an extensive sample of UK fund manager changes over a fourteen year period demonstrates the clear effect management turnover has on the performance of UK mutual funds. The effect can be positive as well as negative.
Over its lifetime a fund may be helmed by a number of managers of differing abilities and therefore its overall performance cannot be attributed to the investment skill of just one. More able managers present an attractive asset to rival fund management groups, who could move quickly to poach them. Managers with lesser ability may spend more time at one fund. This research investigates the impact of fund manager turnover on the performance of equity and fixed income UK mutual funds, using a unique database of manager changes recorded from 1997 to 2011. It represents the first such comprehensive study.
The research found clear evidence that manager change does affect the benchmark-adjusted performance of UK mutual funds. It found significant deterioration in the benchmark-adjusted returns of funds that were top performers before the manager exit. It also found significant improvement in the average benchmark-adjusted returns of funds that had been performing poorly prior to the manager exit. The results support the hypothesis that manager turnover is one of the reasons for the lack of persistence in long-term mutual fund performance.
The authors conclude that UK fund management companies have had some success in finding more capable replacements for poor managers, but they have been relatively unsuccessful in finding equivalent replacements for top performing managers. The recommendation therefore is for regulators to ensure that fund management groups keep their investors fully informed of all management changes at their funds, that they may be aware performance could be affected as a result.
A draft version of the research paper is available for download at the link below.