Our Insights

About personal finance, investments and markets.
July 12, 2017

What should you do when a fund manager leaves?

Hardly a day goes by when a fund management company doesn’t announce that one of its funds is changing managers. In fact, the average fund manager in Europe only stays 4 years in his job. So after seeing the beginning of a track-record, investors are again left wondering what they should do next. An individual investor who only holds a handful of funds is faced with the question whether to sell the fund or stay the course at least once a year. Most investors do not enjoy having to find another fund manager frequently to whom to entrust their assets. But there is a better way.

Improving the odds of your success

We think it is time for a fundamental review of the investment process. Ideally we want to completely eliminate the risk of a fund manager departure from our investment plan. The simplest way to do this is to shift to a passive investment approach via index funds (ETFs). Since 98% of all European based global fund managers have underperformed their benchmark index over the last 10 years, this should be the rational decision anyway. Investors always need to remember that active fund management is more expensive than passively investing in ETF. It therefore follows as the night from the day that, net of fees, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. While ETF have many advantages, they alone do not guarantee success. ETF do not prevent poor behavior. Those who sold their active funds in panic will do exactly the same thing with ETF.

Do you want to get exposure to an asset class or to a manager?

Once you have moved to low-cost ETFs, you can then focus on what truly matters, i.e. how to reach your personal goals via the right asset allocation. Investing shouldn’t be about picking the next hot stock or finding the next superstar fund manager. Instead of focusing on fund manager selection, investors are much better served if they get the asset allocation right and stick with it. Let me give you an example of a smart asset allocation decision: in the current low-yielding environment, many investors have allocated some money to high-yield corporate bonds. But for a long-term investors this is the wrong asset allocation decision because historically a combination of equities and treasuries delivered higher returns with lower volatility. High-yield credit has proven to be an inefficient asset class for buy-and-hold investors, so why own it today when the business cycle is getting long in the tooth anyway, spreads are tight and credit quality in the US is at the lowest level in years?

ETF investors are free riders – nothing wrong with that

But what if everyone invested in ETFs? Active fund managers play an important role in creating efficient markets and ETF buyers are clearly free riding. If everyone indexed, markets would probably cease being priced correctly. We hear variations of this argument often but there is a lot of scare-mongering. Fact is, today only 6% of US equities are held by ETF. We are decades away from ETFs potentially creating problems for markets functioning properly. So relax and enjoy the ride.

ETFs owned nearly 6pc of US stock mkt in Q1