Why mutual fund manager movements matter more than you think: Dimitrios Stafylas and Michail Karoglou

This remarkable rise has naturally piqued the interest of both practitioners and researchers. Investment in this industry is indeed a special phenomenon.

Even more interesting, investing in mutual funds is not just about crunching performance numbers. While benchmarks offer a useful gauge, there is a crucial element that often flies under the radar: the role of the fund manager.

Unlike other industries where leadership changes might not drastically impact outcomes, the departure of a fund manager can significantly alter a fund’s trajectory.

Market practitioners and financial journalists have long acknowledged the deep connection between fund managers and the funds they oversee. This relationship goes beyond mere figures; it encompasses investment philosophy, risk appetite, and decision-making processes.

When a fund manager leaves, it can set off a chain reaction that reverberates through the fund’s structure. These changes are far from administrative formalities.

For instance, a new fund manager might bring a different investment style or set of preferences, which can be reflected in the fund's holdings or how it reallocates assets in response to economic news. Such shifts often lead to changes in the fund’s net assets as investor confidence fluctuates. This is why investors must stay vigilant, reassessing their expectations and risk tolerance, which in turn affects the fund’s market valuation. Especially since fund managers are notorious for changing posts.

So, what factors accelerate or decelerate a fund manager’s departure? In our study, we explored this question by examining market conditions, manager performance, and fund characteristics using comprehensive data from Chinese funds and survival analysis techniques. We identified a three-period lifecycle for fund managers.

The first 12 months serve as a settling-in period, where new managers acclimate to their roles, understand their environment, and gather crucial information. During this time, fund firms also evaluate the new manager’s suitability and performance. The next phase, spanning 12 to 36 months, is the stirring period. Here, the likelihood of managers staying in their posts drops from 80 per cent to 20 per cent. This period is marked by managers becoming more inclined to move, either due to better understanding their workplace or finding new opportunities.

Fund companies, having gathered enough evidence, decide whether to continue or end their collaboration with the manager.

After nearly three years, the probability of a manager staying in the same fund stabilises, entering what we call the temperate period. Interestingly, a small but significant portion of managers remain in their posts for over five years.

Our findings also reveal that managerial performance and rising markets make managers less likely to stay in their posts. Conversely, the riskier the fund’s profile, the less likely a manager is to move.

Like the overwhelming majority of investments, evaluating a fund is no trivial task. Investors face numerous challenges, from selecting the right benchmark to uncovering the true risk behind the polished performance numbers presented by fund managers. Ultimately, however, a fund manager’s skill is what drives both fund performance and its risk characteristics.

Dimitrios Stafylas is Assistant Professor of Finance at the University of York and Michail Karoglou is a Senior Economics Lecturer at Aston Business School