When The Portfolio Manager Exits…

Last week, it was reported in the media that portfolio manager Manish Gunwani has quit ICICI Prudential AMC. The recent past has witnessed a fair degree of churn among managers; media reports suggest that more exits are on the cards.

A portfolio manager’s exit is an eventuality that mutual fund investors are bound to encounter at some point. Given that the manager helms the fund, expectedly, his exit can have a bearing on investors.

On their part, investors must evaluate how the manager’s exit will impact the fund. More importantly, they must determine if the fund should continue to find place in their portfolios.

Sadly, investors’ task tends to be complicated by rather diverse perspectives.

Perspectives

From a fund company’s perspective, a portfolio manager’s exit is often treated as a non-event. Typically, the reaction will be: “we have robust investment processes in place; hence manager XYZ’s exit will have no impact on our fund’s performance”.

To be fair to the fund company, it is in its interest to say so. One can’t expect a fund company to admit that a manager leaving is a loss, and that investors could be in for troubled times.

On the other end of the spectrum is the portfolio manager-centric perspective. The latter stems from the belief that the manager is the be-all and end-all for the fund. Hence, all bets are off.

As is often the case, the truth lies between the two extremes.

Individual Brilliance versus Institutionalised Skill

Let’s understand how the investment process works at a typical fund company. The investment team comprises of products specialists, risk management professionals, research analysts, and portfolio managers. Each group performs a specialised task utilising an array of tools and resources.

Investment ideas are originated, debated and vetted before making it to the fund company’s ‘approved’ investment universe. Paper portfolios (also referred to as model portfolios) are created and tracked as an internal guideline. Often each fund is backed by a unique template listing guidelines.

Though the portfolio manager is the first among equals when it comes to running a fund, at times, investment committees also have secondary oversight on funds.

As is evident, a fund company deploys considerable resources to institute investment processes. Hence their typical reaction in response to every manager exit.

So does that make the portfolio manager redundant? Can investment processes eliminate the need for a manager? The answer is--No!

To begin with, not every investment process is necessarily robust. It takes a skilled manager to capitalise on available resources and process. Indeed, in some cases, the manager’s individual brilliance can deliver pleasing results, despite the presence of a less-than-robust investment infrastructure.

The truth is that if processes in isolation could have guaranteed success, then every buy and sell decision would have been made using algorithms, and the portfolio manager would have been an extinct species.

Conversely, those who believe that the manager is the be-all and end-all, must not forget that without the fund company’s resources and instituted processes, a manager could find himself disadvantaged, and perhaps unable to play to his potential. Though the manager is the face of the fund, the forces behind the scenes shouldn’t be overlooked.

Simply put, both investment processes and the manager’s skill contribute to the fund’s success. It would be imprudent to discount either of them.

One Size Doesn’t Fit All

Each fund company has in its arsenal, different investment processes and managers possessing varied skills. Hence the key is to determine which factor contributes more to the fund’s success.

For instance, a combination of a robust process plus a skilled incoming manager can make a manager exit, a non-event. Conversely, if a fund’s success can be largely attributed to the manager’s presence, then his exit should raise a red flag, irrespective of what the fund company claims. In other words, the impact of a manager exit needs to be evaluated on a case-by-case basis.

Admittedly, understanding the nuances of a fund company’s internal workings can be difficult for an investor. That’s where the investment adviser has a part to play in helping the investor make an informed decision.

All in all, a manager’s exit merits consideration, and investors’ response should be based on an in-depth understanding of the facts of the case.