Does Fund Manager Tenure Matter?

CATEGORIES: Investment Analysis

Does Fund Manager Tenure Matter 

Does it matter how long your fund manager has been plying his or her trade? How much weight should you give fund manager tenure among all the things you take into account when making a decision about where to invest? Let’s take a look at this piece of the investment selection puzzle.

Defining Tenure

There are several tenure metrics you might want to take into account when evaluating a fund manager’s track record. The most basic definition of “tenure” is typically how long the manager has been at the helm of whatever fund you are evaluating. “John Smith has been manager of the GrowthPro Fund for 17 years” is the kind of information you will typically see in fund literature. This is a simple metric and it is arguably a useful data point. Long tenure indicates that the fund manager has managed to stay around without getting fired and has presumably learned the ropes and had the time to carefully implement and fine-tune whatever strategy the fund is advertising. Of course this tenure number cannot simply be referred to in a vacuum—you also have to look at the performance over that time period. A manager responsible for a fund that bills itself as seeking to outperform the S&P 500 would raise eyebrows if it turned out that the fund had dramatically underperformed the benchmark index for most of the manager’s tenure—and if that tenure were suitably long it would raise questions about the parent organization’s willingness and ability to make tough decisions around their fund manager talent.

Consistent Strategy?

You also want to check the manager tenure number against the fund’s investment strategy over that time, to see if the entire tenure has been spent in executing a single strategy or whether there have been changes of direction in the fund’s investment philosophy and approach. It happens frequently enough that funds feel pressure to change strategy if their bread-and-butter formula is for whatever reason out of favor. This notably happened during the great dot-com rally of the late 1990s. During that period Internet companies and tech stocks generally did fabulously well while other areas, like deep value investing were conspicuous underperformers. That caused many value managers to drop whatever approach they were following and try to compete as growth / high tech managers—and the outcomes more often than not were not happy ones.

What About the Team?

Fund managers normally don’t work alone—there is usually a team of other portfolio managers, analysts, operations specialists and so on to support the effort. It is well worth getting to know the team, seeing how long key team members have been working with each other and collectively how much investment experience they bring to the effort. You may see a statement like this one: “Between them, these five key individuals have 110 years of relevant investment experience”. At first glance, it can seem like a bit of a silly statement, but it is actually a good piece of information to know.

Signs of Trouble?

Basically, what you want with your fund manager is the sense that he or she wakes up every morning and really looks forward to getting into the office to do things that will produce returns for your fund. Look through the fund literature to find out how the manager is compensated and whether the financial incentives in place are more short term or long term oriented (this information is available in fund prospectuses and other documentation). Read through the manager’s CV to see where he or she has worked before and if there is a sense that they like to frequently job hop. For that matter, give some consideration to how old they are and whether it is likelier than not the manager will wake up one morning and decide it’s time to start hitting the links everyday or growing an organic vegetable garden.

These things matter. Ultimately, fund manager tenure is just one data point in a more holistic evaluation of everything the manager, the team, and the organization for which they work bring to the table. It pays to do the full investigation and not just rely on the one data point of fund manager tenure.

Tell us… Do you have particular preferences for fund manager tenure?

 

Find the best funds that fit your fund manager preferences by using Jemstep’s free investment recommendation tool.


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About the Author

Katrina Lamb is a CFA for Jemstep. She has over 25 years experience in economics, finance, international development and management strategy, with a strong focus on global markets. She provides a voice of clarity, logic, and reason in an environment characterized by high uncertainty.

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