Patient Investing Is A Virtue: Financial Advisors' Daily Digest
By SA Gil Weinreich :
Good news for high profile mutual fund managers: Your firm probably can't afford to let you go. That is one implication, albeit not the intended one, of a new study by Morningstar called "The Aftermath of Fund Management Change."
Its author, Madison Sargis, was primarily investigating whether observed investor behavior is aligned with eventual investor outcomes, and found that they were not. That is to say, investors have tended to yank their funds when management changes are announced, despite the fact that the departure of the fund's manager did not adversely impact fund performance. Here's a key quote from the study:
This study highlights a flaw in current investor behavior. Whether the investor is an intermediator-such as an advisor or wealth manager-or an individual, our study suggests that investors are too quick to act. When a management change occurred within the prior three months, the average fund will experience outflows resulting in 2.0, 2.5, 2.3, 2.6, and 1.7 lower category percentile growth rates over the next one, three, six, 12, and 36 months, respectively. The effect is persistent. Funds experiencing management changes more than a year ago still experience lower growth rates. Over the same respective time periods, the outflows result in 2.3, 2.9, 2.9, 3.2, and 1.9 lower category percentile growth rates. Anyway we looked at the data, funds with management changes experience sustained periods of outflows. Investors continue to withdraw money from funds even though there is no change in fund performance.
You can read the study here , but the long and short of it is that mutual funds generally do not live or die by their managers (an interesting observation from a firm that each year names its "Morningstar Manager of the Year" to much fanfare) since the funds these days are run by a team and are highly systematized. Thus, if fund fees were not increased, investors ought to take a "wait and see" approach, the author concludes.
That's all well and good, but the study prompts additional thoughts of my own. First, it is an important reminder of the reality that some large number of investors don't just stand there - they do something. In the immediate aftermath of Bill Gross's departure from Pimco, the asset management company was seeing billions of dollars of redemptions each month. Its flagship fund, which in late 2013 had almost $289 billion in assets, lost $23.5 billion in September 2014, mostly after Gross quit on September 26. That's quite a flow. In November of that year, fund assets totaled $162.8 billion . Today they are under $100 billion.
These departures came in the wake of a top manager's departure. What I find far more troubling is when investors pull assets when the manager is still at the helm implementing his long-term strategy, while impatient investors want to see immediate results. One sees this time and again with value managers in particular. Even the most brilliant lack the eloquence to persuade investors not to fire them for protecting them. FPA Capital's Bob Rodriguez thought stock prices were too high in early 2000, so he raised cash. Over half his assets fled. His fund went on to stellar performance, but his dot-com-addled shareholders missed his recovery. He raised even more cash prior to 2007-2009, but he again lost over 50% of his assets. First Eagle's Jean-Marie Eveillard lost two-thirds of his assets in a similar situation amidst the dot-com craze.
With stocks going up and down every second and news stories updated as you're reading the webpage, it's little wonder that addled investors go with the quick-changing flow. But what is a true wonder are the rare displays of constancy by top managers and investors who reap the rewards of their patience.
Your thoughts, are as always, welcome in our comments section. And please see today's other financial advisor-related links:
- Erik Conley gets a sense at what's happening in the market by following money flows .
- Janus Henderson Investors provides perspective on tech sector volatility .
- SA Editor Mike Taylor, CFA reviews Douglas W. Jamison and Stephen R. Waite's " Venture Investing in Science. "
- Latest report on proximity to financial ruin shows over a third of California households with no emergency savings.
- For more content geared to FAs, visit the Financial Advisor Center .
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