Should Barbie Follow Her Fund Manager to Another Firm?

While Barbie has successfully made the transition from her Malibu house to the big screen, star mutual fund managers often find it more difficult to maintain a high level of outperformance after jumping to a new firm. They do, however, outperform their old funds after moving to a new job.

Morningstar reached this conclusion after looking at the performance of 518 mutual fund managers with at least three years of experience at their old firms and at least three years at their new firms. The period analyzed ran from 1990 through 2022.

If Barbie is the risk-taking type of investor, she could benefit from initially following the fund manager to their new firm. The average fund manager improved their risk-adjusted annualized outperformance (alpha) during their initial three-year tenure at their new jobs. Average alpha rose from 0.67% during the last three years at the old firm to 1.36% during the first three years at the new firm. (Morningstar calculated alpha relative to each fund’s category index.)

The outperformance sounds pretty good until you look closer at the numbers. Fund managers at the 75th percentile realized three-year alpha of 2.85% at their new firms versus 2.16% at the old firm. Conversely, fund managers at the 25th percentile incurred an alpha of –0.53% at the new firm. (A negative alpha occurs when a manager’s decisions cause the fund to underperform its benchmark.) These numbers are aided by positive factors such as the new fund lending extra support to the fund manager who switches and a smaller starting amount of fund assets. A lower level of assets under management (AUM) often makes it easier to carry out a particular investment strategy.

At five years, the numbers are less impressive. Alpha falls to 1.22% at the new firm from 1.30% at the old firm. Worse yet, this five-year number reflects survivor bias. It excludes the managers who did not last five years at their new firm after having at least five years of tenure at their old firm.

Notably, Barbie would not have much to brag about to Ken if she stayed with the old fund manager. Morningstar observed that fund managers who switched “outperformed their old fund (under new management), on average, by 52 basis points annualized.”

There are a few reasons why the outperformance of fund managers at new firms wanes over time. One reason is simply a lack of persistence in terms of realizing alpha. Even the best fund managers incur periods of underperformance—and picking which manager is least likely to do so is extremely difficult. Another involves the new work environment. The fund manager’s new firm may have a different team of analysts, a different culture and/or different resources. The new firm’s team dynamics may differ as well.

One thing Barbie and all other investors can do when faced with the decision of whether to stick with a fund is to look at its expense ratio. Morningstar used gross returns in its performance calculations. This limited the analysis to how managers performed but boosted the returns relative to what shareholders realized. As Morningstar put it, “looking at returns before fees paints a rosy picture, as fees erode a large part of excess returns. Our experience and academic research show that it is difficult to find portfolio managers who can consistently produce alpha after fees over the long term.”

Morningstar mentioned a few other key things to look at. How closely the objective and strategy of the new fund match that of the old fund is one key factor individual investors can pay attention to. The other ones—support and resources, cultural fit and team dynamics—are impossible for us to determine.