Adapting To Fund Manager Changes

One of the things that worry the slightly evolved mutual fund investors is this business of fund manager changes. By the time you figure out that some of the equity funds you have chosen are actually making good money, and that this was because of the actions of someone called a fund manager, you could be hit with the news that the fund manager is changing.

This is a bit of a problem. You see, unlike some funds in the more mature markets, the fund manager is not really a brand in India. People generally invest in a particular fund because it has done well. Or, if they, are absolute beginners, they are likelier to invest because the fund company is a big brand like ICICI or HDFC or Reliance. At some point, those investors who are interested enough to learn how mutual funds work come to know that investment decisions for each individual fund are taken by a specifically designated fund manager.
And then, sooner or later they come to hear that a fund manager has changed. This happens a lot. Over just the last 24 months alone, there have been 187 fund manager changes for equity funds. The total equity assets managed by the Indian fund industry is Rs 2 lakh crore. Out of this, about Rs 98,000 crore—almost half—has seen a fund manager change over the last 24 months.

Is this a problem? Is this something that investors should be worried about? Unfortunately, the only reasonable answer is that it depends. It’s actually quite hard to figure out quantitatively how much of an impact a fund manager change has had on a fund. All equity fund are managed within a context of their investment mandate, their institutional parentage and obviously, of the market conditions. Isolating the exact impact of this vs that fund manager is actually impossible. There have been a few cases when a fund manager’s exit led to a slump in the funds’ performance. However, there have been some cases when new fund manager has proven to be better than the old one. At the end of the day, there is little in it except to say that when a fund manager changes, investors have to be extra vigilant in monitoring their fund for any changes in performance.

That still leaves investors with the question of why is there such a flux. Why are there so many changes in the management of funds? One reason is that there is generally a lot of flux in all sort of skill-based jobs in India. Like any other white collar job in a growing industry (and specially in financial services), changing jobs is a major way of moving up in one’s profession. It’s unfortunate that the managements of fund companies are unable to create conditions in which this is not the case, but that’s the way it happens.

The other issue is that of good fund managers themselves moving up the ladder into marketing and general management jobs in order to move up in their professions. I’ve seen this happen time and time again in the fund industry. Once a fund manager gets a good track record, he seems to spend more and more time talking to investors (at least the bigger ones) than on fund management proper. This is basically a selling job. Or, he’s expected to start managing and mentoring junior fund manager, regardless of whether he is actually any good at it.

Eventually he rises our of fund management altogether and becomes CXO, for some value of X. This is great for his career and the way most corporate careers work. However, perhaps fund management jobs should follow a different model, perhaps like that of surgeons. You don’t hear of a good surgeon moving forward in his career by abandoning surgery and becoming a hospital administrator, do you?