You’ve carefully researched a mutual fund and decided to invest based partially on the fund manager’s track record. Six months after owning the fund, the manager leaves. Is it time to sell or just scream in frustration?
One of the steps in a mutual fund screening process for actively managed funds is to verify the same fund manager has been running the fund for the period of time you are reviewing. Once the fund makes it into the final cut, you should verify the manager is still running the fund before you invest. However, if the manager leaves, you should suspend additional purchases of the fund but not automatically sell the shares you already own.
Mutual funds are often run by teams where the next in line will step into the lead manager role. The security selection process doesn’t change and the fund’s performance shouldn’t be affected. You may want to put the fund on a more frequent review cycle. Look for a change in the types of securities being purchased or the amounts. We do not want our funds to be over-weighted in one security or one industry, because that situation increases risk. A deviation from broad diversification of the fund would be a sell signal for us.
Another red flag would be increased activity in the fund as measured by turnover. Turnover is a hidden cost in a mutual fund and can lead to unpleasant tax consequences if the fund is held in a taxable account. Part of our selection process is to choose funds with low turnover.
Ultimately you would want the fund to continue to perform in line with expectations. Your regular review process should alert you if performance starts to suffer, which could signal it’s time to sell.