Do I follow my favourite manager to a new fund?
There are probably a few investors out there who feel like they have a big "L" on their forehead. I'm referring to people who owned both a CI fund managed by Kim Shannon and a Fidelity fund managed by Alan Radlo. Ms. Shannon and Mr. Radlo no longer manage those funds and have gone on to other challenges. Kim has set up a new company in partnership with Brandes, and as I write this, there are only rumours as to where Alan might go next.
In reality, the investors I'm referring to are more likely to have been winners given that these two managers have been among Canada's best over many years. But whether you feel like a winner or loser, if you've been affected by these changes, you have decisions to make.
First of all, the most important ingredient in generating attractive investment returns is the lead manager. Other things are important, such as the organization they work for and the team they have around them, but the person making the decisions is the key.
Second, I don't have a problem with a manager looking for a change of scenery. It's a reality in our world today. People move around. Sometimes a change is required to freshen up an outlook or skill set. I will say, however, that money managers don't have the same freedom as us other working stiffs.
There are only so many changes they can make in a career. Clients don't like change and certainly don't like paying more taxes or additional commissions (which I haven't considered in my analysis below). If well-known managers are hopping around like mercenaries, their loyal client base will shrink pretty quickly.
Third, there are positives and negatives to the "star manager" system, but one of the great positives is the transparency. As of last month, clients knew that Alan Radlo was no longer managing their Fidelity fund. When funds are managed by teams or organizations, you often don't know if a key person has left or other changes have been made.
So if I were affected by a manager change, what would I do?
I'd treat every situation differently, as there are a lot of factors at play, and I don't think it makes sense to have a set rule.
If I'm paying a fee for advice to own these funds, then I'd lean on my adviser to get to the bottom of the situation.
While I wouldn't be compelled to rush my decision, there is one thing I'd deal with right away, if necessary. If a new manager has been assigned to the fund and significant changes are anticipated, then I would sell the fund immediately. Why? Because the stocks my favourite manager picked are being punted. And existing unitholders, including me, will have to absorb the transition costs, which could be substantial.
As for assessing what to do next, I'd sit back and watch for a while. This is not to see how the fund performs -- short-term performance means nothing, and whether Ms. Shannon or Mr. Radlo get off to a fast or slow start should have no bearing on the decision. Rather, it's to let things settle down. Let the new fund get up and running. Let the early adopters absorb some of the transition costs that may go along with the manager change. Certainly, the manager has lots on his/her mind at the moment. Why not wait until all the road shows and media appearances are finished?
During this time, I can reassess whether I still believe in the manager's philosophy and approach. I want to get a feel for whether they are moving to an investing environment that is as good as or better than where they came from (e.g., supporting cast, corporate philosophy). Some mutual fund firms seem to churn through managers. Does it look like my favourite manager has found a situation he/she is going to stay in for a long time?
I also want to know whether my star manager will have to spend more or less time marketing than they did before. After all, I'm following them so they can manage my money, not be a marketing machine.
In the context of my comments above, there's nothing I can say at this point on Mr. Radlo. I've met with Ms. Shannon on a couple of occasions, but I don't know her well. It appears to me that she's making this change for the right reasons.
She has always wanted to build Sionna Investment Managers into a first-rate, sustainable firm and she's been willing to invest in her business (i.e. build a team around her). Creating a special alliance with Brandes is consistent with that and the fact that she is taking a huge financial hit, and risk, reinforces her long-term commitment.
The investment team at Sionna is unchanged, so her investing environment has been maintained. And I've got to think that after the initial road shows are over, her marketing demands will be reduced (Brandes has a considerably smaller sales and marketing team than CI Funds has).
My approach here is not meant to be exhaustive. There are additional things to consider, including who the new manager is for your fund, what taxes and commissions are involved and whether you're contemplating other changes to your portfolio. But the key point is that if one of your funds loses its investment manager, there is a choice you will have to make.
Tom Bradley is president of Steadyhand Investment Funds Inc.
Tom Bradley