What should an investor do when their mutual fund manager quits?

Soumendra Nath Lahiri, the star fund manager of L&T AMC, has put in his papers. Lahiri had been handling several large equity schemes like L&T Emerging Business Fund, L&T Midcap Fund, L&T Tax Advantage Fund, among others, directly and some schemes indirectly as Chief Investment Officer (CIO). Since the combined equity AUM of L&T is over Rs 31,000 crore, his exit has created anxiety.

Several high-profile fund manager have quit in the recent past including Manish Gunwani of ICICI Pru AMC, Sunil Singhania of Reliance AMC and Kenneth Andrade of IDFC AMC. “Such changes are bound to happen in any industry. Fund managers may move to greener pastures or they want to do something of their own. Investors should be ready for such exits in future too,” says Tanwir Alam, Founder & CEO of Fincart.

Fund manager is still the star
Though AMCs insist systems and processes followed by them are more important than individuals, the fact is a fund manager’s contribution to scheme performance is high. The performance of several schemes plummeted after their star fund managers left (See table). On an average, the schemes generated an annualised outperformance of 3.71% over their benchmark three years prior to the exits, but it became under performance of 1.31% after they left.


So how should investors react to a fund manager’s exit? The first step is to go back to the drawing board and take a closer look at the rationale behind investing in that scheme. “If you invested in a scheme because of its star fund manager, you need to take action. However, stay invested if you were satisfied with the systems and processes of that AMC,” says Amol Joshi, Founder, PlanRupee Investment Services.

Scheme performance often suffers after star fund managers exit

Source: Morning star, ACE MF. Compiled by ETIG Database. Only fund managers who left at least an year ago and schemes with Rs 3,000 cr AUM at the time of their leaving considered.

Systems and processes
How do investors assess the systems and processes when every AMC claims that they have the best? One way is to look at the number of analysts, fund managers, their experience, etc. Systems and process driven management wil be the norm in fund houses with a large number of fund managers. Also look at the historical performance. “If the scheme is in the first or second quartile most of the time, that AMC should have good process. Fund managerdriven schemes usually move between the first and fourth quartile regularly,” says Tanwir Alam, Founder & CEO of Fincart.

Philosophy
The philosophy of fund houses is also very important. For example, Motilal Oswal AMC strictly follows the ‘buy right, sit tight strategy’ and the same can be measured in terms of its lower portfolio turnover ratio. Similarly, Franklin Templeton and ICICI Pru AMCs follow their value strategy judiciously, though this has resulted in some underperformance. Axis AMC follows its growth and concentrated bets strategy. “It depends on the investment experience you want. If you are a value investor, don’t go for the AMC or schemes with growth strategy and vice versa,” says Joshi.

What to do
Assume you invested in a scheme because the philosophy of the AMC and fund manager matched that of yours. What should you do now? The first option is to followthe star fund manager to the next fund house. However, this may not be a right strategy. First, the outperformance of a scheme is the combination of the brilliance of the fund manager and that of the systems and processes in an AMC. Thus the star manager in one AMC may not be able to deliver the same results in another AMC. Secondly, the fund manager may be leaving the industry altogether. Rumours suggest Lahiri is heading into the private equity space.

The second option is to leave the investment untouched and wait for clarity. “Since most AMCs have strong systems in place, investors need not pull out in a hurry. However, they need to monitor the scheme’s performance for the next 6-12 months,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories.