Should You Run for the Exits When a Fund Manager Leaves?
Why is Bill Gross' exit from PIMCO front page news? Type "Bill Gross" into Google search and out pops over 1.7 million listings. Clearly, Gross is someone to watch. Gross is the co-founder and former co-chief investment officer of Pacific Investment Management Company, LLC or PIMCO. His PIMCO Total Return fund, historically an excellent performer, recently returned less than its peers in several years.
Additionally his exit from PIMCO to a fund firm rival, Janus, to manage the unrestrained global bond fund, is accompanied by an U.S. Securities and Exchange Commission's review for artificially boosting the returns of the PIMCO Total Return ETF.
Are these sufficient reasons to sell a fund? There are many factors to explore when considering whether to jump ship after a manager's exit. A manager's departure should be just one consideration.
In the case of the PIMCO Total Return Bond Fund, let's look at a recent comment by Eric Jacobson, a senior analyst at Morningstar.
"Bill Gross had been synonymous with this fund since its 1987 inception, so his Sept. 26, 2014, resignation was jarring. However, he left behind an enormous staff of talented managers and analysts that he had hired and trained over the years, and they have stepped up to take on important roles in his absence. They include 2013 Morningstar Fixed-Income Fund Manager of the Year Dan Ivascyn."
Morningstar is confident about the future of Bill Gross' flagship fund. Does that mean you should be too?
There's more than one reason for exiting a mutual fund.
5 factors to consider before selling a fund. When a manager leaves, or the returns lag the fund's peers, you may think about selling. But, before you sell a mutual fund, consider why you bought the fund in the first place. It's not unusual for a fund to lag on occasion, nor is it a surprise if the manager leaves (most of the time).
Prepare yourself for the selling decision and think about these questions before you sell:
-- Why did you initially invest in the fund?
-- Were you looking for a particular market segment in which to invest?
-- Did you appreciate the style of the manager?
-- Is the fund managed by one manager or a team?
-- What is the current market environment?
Before even considering whether or not to pull the plug, remind yourself what your goals were by investing in the fund and how they fit with your overall investment strategy. Never sell on a whim. Give both the fund buying and selling decision some analysis and thought.
Next, consider these issues before selling a fund:
1. Did the fund lose significantly more than its peers or benchmark during a year? A big loss can put you on watch. This may suggest several things. Maybe the fund is not adhering to the strategy it claims. This is called "fund drift" and occurs when a fund's investment style shifts away from its stated objective. Maybe the fund's approach is on a decline. That said, a 1-year performance is a relatively short period of time during which to evaluate an investment.
2. Did the fund change its strategy to fit market conditions? During some periods, large-cap stock returns trounce those of small-cap value. Other times, bonds are beating the returns of stocks. In general, these are reasons to maintain a diversified investment portfolio. If you find your large-cap fund is investing in small-cap stocks, you may want to sell. Chasing a particular investment style rarely works and you want to know your investments are allocated the way you prefer.
3. Has your fund underperformed for several years? First, make sure you're comparing your fund's performance with the appropriate benchmark. If you own a small-cap fund and you're comparing returns to the large-cap Dow Jones Industrial Average, then that is an inaccurate comparison. If the fund continues to underperform, year after year, when compared with its benchmark (as stated in the prospectus), it may be time to sell.
4. Have your goals and objectives shifted? For example, if you're retiring in a few years, you may decide to sell a stock fund and raise extra cash. That way, if the market drops as you're ready to retire, you'd better uphold your net worth. Or maybe you just need to raise some cash for another use.
5. Does the fund have a high management fee? Consider exchanging the fund for a similar type with a lower management fee. Over time, research shows that it is tough to justify owning a high-fee fund.
6. Final bonus reason to sell. Is the fund manager leaving? Look at this reason in conjunction with the others. Consider the possibility that the fund is team-managed. In that case, the departure of one manager is less important. Although it is usually not a singular reason to sell a fund, in accord with other explanations, a fund manager leaving may tip the scale in favor of a sale.
Barbara Friedberg, MBA, MS , is a portfolio manager, consultant, website CEO and author of "How to Get Rich; Without Winning the Lottery." Learn more about money and pick up her newest free investing book at Barbara Friedberg Personal Finance.com .
