Lipper Research Senior Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN Tuesday - Changes in Mutual Fund Managers

Tuesday, November 22, 2005

A. A couple, one specific and another broader. Specifically, the fundseemed to have become fairly conservative (it is still pretty large!);broadly, the new manager supposedly is more aggressive in his style.

Q. So, what does that mean for investors?

A. That probably depends on who a person is risk-wise.

• If you have been disappointed that Magellan seemed to become quiteÊ average and very highly correlated with the S&P 500, you may welcome thechange.

• If you are concerned about the market possibly dropping, the changeÊ Êto a more aggressive manager might be a negative for you. Or, ifÊ Êthe market goes up nicely, you might be better served now than inÊ Êthe recent past.

Q. And your more general thoughts?

A. This is one of those events that should act as a catalyst forÊ people to do some thinking and possibly take some action.

Q. That sounds pretty neutral; what are you getting at?

A. Well, again it may depend on who the investor is, but a change of fundmanagers is a major event that should cause people to take a look and makea decision: should I hold, sell out, or maybe buy more?

Q. Why do you say it is such a major event?

A. Actually there are fairly few newsworthy events in the life of a fund.But certainly, the person who is running it is critical. I imagine thatwhen Jack Welch left GE, or when Carly Fiorini left Hewlett, some peopletook that as a signal in one direction or another. But at least theyactually thought about possible action! The head person of a fund clearlyhas the most clout about how it will be managed.

Q. But as long as the fund is still managed by the same company, is therelikely to be much real change when a new person sits in the chair?

A. Possibly not, but sometimes it can be significant, particularly if youoriginally bought the fund because a certain person was the star manager.Now that star has moved on, so it makes sense to think out your currentstrategy and reasons for holding or not holding. If you owned seasontickets to the Rockies and Todd Helton were traded, you'd probably thinkhard, wouldn't you?

Q. What other events in the life of a fund should be signals for people toreally think about selling/holding?

A. A few come right to mind:

• The management company running the fund is merged or sold, soÊ Êreally a new regime is coming in. A current example isÊ ÊCiticorp/Legg Mason.

• The board proposes some significant changes in fundamentalÊ Êinvestment policy.

Q. Can you give an example of that? I thought a fund's policy was prettymuch carved in stone?

A. Major fundamental changes in policy do require shareholder approval.Shareholders usually do in fact vote to give approval, since there is noopposing argument given in the proxy materials for the vote. But supposeyou own an older Europe fund and it now proposes to include Eastern Europe.That might or might not help its investment results, but clearly the fundwill now become more volatile in its returns. Maybe you already own anemerging markets fund to the extent you wish, so this change in policywould alter your intentions on asset allocation. You should at leastconsider how to reshuffle your money. Find out if the advisor has anyrecord of investing in the new area and so on.

Q. Other examples of important events?

A. Advisors sometimes propose fee changes. ÊThey can cut the fee withoutasking approval, but they must get permission to raise it. ÊThey may havesome fair reasons for an increase, and the holders might or might notapprove. ÊPerhaps part of why you bought the fund was its relatively lowcost vs peers (Lipper Leaders Expenses rating). ÊWell, now that may havechanged. ÊIf you're not happy, you can make a change!

Q. Other things that would prompt a rethinking?

A. Sure, suppose the advisor starts using some more aggressive (they mightbe called sophisticated or additional) techniques, like adding leverage orusing derivatives. That was not what you originally chose or bargained for,so you don't need to stand still if you don't really like it. There areabout 4,000 equity funds out there, so you probably have a number of otherchoices that will suit you better. You don't need to roll over and justaccept the change.

Q. What if you have a big capital gain and want to get out because of thenew changes?

A. That's a tough choice. It may come down to how important avoiding thenew change is to you. You might have an investment loss somewhere else thatyou could also realize to offset the gain for taxes. It's coming up to taxtime anyway, so why not do an overall review? Again, the event is a usefultrigger for thinking and possibly acting.

Q. Do you think a change of managers or some of these other events shouldalways or usually be a signal to sell?

A. Not necessarily, but I do think they should always be a signal to Ê Êsitdown and think! My basic question always is, "knowing all the informationnow, would I buy this today if I had the cash?" This is true for stocks andmutual funds. Holding should not be a default but an active choice.

Q. So, do you think investors may hold things too long?

A. That's hard to say, since each person is different. I would saythat people tend to be collectors rather than ongoing examiners oftheir investment holdings. They tend to put a lot of effort into their buydecisions, and that tends to bias them toward not changing their positions.The average equity fund is held about 31 months, and the average fundmanager in growth funds holds a stock for about 11 Êmonths. I'm not sayingeither is per se better, but it sure is a bigdifference. So, any and every signal of it being time to stop andthink is a useful event and should not be ignored.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).