By Jonnelle Marte
The decision by high-profile fund manager Bill Miller to step down from the Legg Mason Value Trust fund he ran for 30 years highlights a challenge for investors: What to do when a fund’s manager steps aside?
Miller made his name beating the S&P 500 index for 15 consecutive years ending in 2005, only to see his triumphs decimated by his big bet on banks in 2008. For the investors who stuck with the fund as it shrunk from $20 billion in 2005 to $2.8 billion, there’s no easy answer as to what to do next, analysts say. But those confident Miller was on the path to a comeback can take some solace in knowing the successor he trained, Sam Peters, plans to follow the same investing strategy. That may keep fans of Miller’s approach who were waiting for a comeback in the fund, says Bridget Hughes, a fund analyst for Morningstar. Peters, who has worked under Miller’s wing since he started at the company in 2005, will have co-managed the fund for 18 months by the time takes over in April, minimizing the chance of any surprise changes in management style, she says.
While it’s impossible to know how a new fund manager will fare, analysts say there are certain signs investors can look for. Here are the three main questions advisers say any investor should ask before deciding whether or not to stick with a fund following a change in management.
How abrupt is the change? In the case of the Legg Mason fund, the transition should be smooth because Miller and Peters have been co-managing the fund for roughly a year, says Hughes. Investors who like Miller’s style can rest easy knowing he’s trained his successor, she adds. But if a manager is suddenly ousted or falls ill, that creates more uncertainty about the direction of the fund, says James Holtzman, an adviser in Pittsburgh with Legend Financial Advisors.
What is the new manager’s record? Investors should also look to the track record of other mutual funds the manager runs, or has run in the past, says Hughes. Peters, for example, has been managing the Legg Mason Special Investment Trust with a strategy similar to the Capital Management Value fund– both have a high concentration in certain sectors and a “contrarian style,” says Hughes. But past approaches won’t provide a clear sense of how the manager will invest in his new position, says Todd Rosenbluth, a mutual fund analyst with S&P Capital IQ.
Is the fund’s mandate changing? Sometimes when mutual funds get new managers, they also shift investment strategies. Investors should stay on the lookout for emails or letters alerting them to any changes to the fund’s mandate or prospectus, says Holtzman. He also suggests watching the performance of the fund for signs of a shift in approach. The performance of the Legg Mason Value trust fund hasn’t changed much since Peters joined the team, says Hughes, and the two managers have taken steps that could reduce the fund’s volatility, such as reducing the stakes of single stocks in the portfolio and branching out to other sectors. “We are sort of in this experimental phase,” says Hughes.