Do Star Fund Managers Stay on Top After Switching Firms?

A study delves into whether investors should follow successful fund managers when they shift to a new firm.

The Morningstar Manager Research study spanned from 1990–2022 and scrutinized both European and U.S. funds, focusing on surviving and liquidated open-end equity and fixed-income funds. A noteworthy 518 fund managers who underwent at least one firm change, with a cumulative managerial tenure of six years, were identified. When this stretched to a decade, the pool shrank to 195 managers. Fund managers who switch firms often opt for smaller funds, affording latitude for more substantial investments in lower market-capitalization issuers, in an effort to amplify outperformance (alpha generation). Newcomers grapple with the period required to replicate the performance that warranted their hiring. Over a five-year span, a marginal dip in equity managers’ outperformance at their fresh appointments was observed, registering an average of 1.22% versus an average of 1.30% at their old firms. Monthly gross returns were calculated, removing the effect of fees and isolating potential value added.

Managers’ Three-Year Alpha at Old and New Firm

Source: Morningstar Research.

Outperformance at the former establishment holds limited predictive power for outperforming at the new entity. Thus, managers who once delivered a robust positive alpha might erode value in their new roles, and, conversely, those who underperformed might shine elsewhere.

Asset levels that managers can attract with their personality and reputation can be a hiring consideration, along with a manager’s depth and breadth of investing experience. The study’s data highlights that among 335 managers with a five-year record at their original firm, 42% did not stay long enough to log a parallel record at their subsequent destination.

Evaluation of managers solely on their track record appears to be a flawed strategy. Discerning investors should consider factors impacting a transition: alignment of investment philosophy, support and resources, cultural fit, team dynamics and fees.

Source: “Fund Managers Switching Firms, Should You Tag Along?”; Morningstar Manager Research, May 2023.