Q: There’s news that L&T AMC is on the lookout for a sale. There’s also news of key fund managers resigning or switching AMCs. What should I do with my investments in such funds? What do you do when a fund manager changes in your recommendations?
A: First, change is not always a problem or a bad thing – it’s not that your fund or the AMC whose funds you hold is the only good one! An AMC merging into another fund may benefit from a new management, see improved processes and systems, access better research, and so on. There have been plenty of mergers in the MF space, and they have not collectively failed for mergers to be a cause for worry. L&T AMC, for example, itself took over Fidelity eight years ago and managed to maintain reasonably above-average funds for the most part.
Besides, in some funds, changes could actually work to your advantage! Funds can see new managers and yet remain steady performers. Here are a few examples:
- Invesco India, for instance, sharpened its processes after it took over from Religare.
- Canara Robeco Diversified Equity changed its strategy after a change in manager which helped improve its performance.
- UTI Equity, which saw the exit of a strong manager and a strategy change under its new manager has stayed ahead of most peer funds.
The point is this – funds can undergo changes in manager and/or AMC and still remain worthy investments. That means, the best thing to do is wait and see the impact of the change on your fund’s returns when your fund manager changes. There is no benefit in unnecessarily churning your portfolio when your fund can continue to do well.
But there are points you can watch out for when such a change happens.
AMCs merging
Now, consider the first question on one AMC merging into another. There are one of three possibilities for fund you hold in such events:
- The fund continues to function as it is: this happens when the new AMC does not have a similar fund as that of the old AMC and therefore decides to continue to run it as it is on a similar mandate or strategy.
- The fund’s mandate changes: this happens when the new AMC slots the fund into a category where it has a gap in its existing fund basket or where it sees opportunity. For instance, the new AMC may not have a large-and-midcap fund, and therefore could convert the old AMC’s say, multi-cap fund to fit that slot.
- The fund merges into another:this happens when the new AMC has no place to fit the fund. Under the current categorisation rules, an AMC can have only one fund per category other than those such as thematic or index. Therefore, fund mergers are quite likely when a large AMC with a full range of fund offerings merges into another big AMC.
In all these cases, you can decide whether to continue to hold your fund or exit based on the nature of the change.
Will the fund in its new form continue to meet your requirement, both in terms of minimum period of holding required (important in debt) and the level of risk it will take?
- If the answer is yes, you can continue to hold the fund. For example, a multi-cap fund remaining so in both the existing and new AMC does not involve any change in timeframe needed or risk level. You can watch the performance of the fund for 3-4 quarters post the merger. Continued steady performance simply means that you need to take no further action other than your routine review.
- You can also wait it out where the impact of the new mandate on suitability or risk is not clear. For example, a multi-cap fund that was aggressive turning into a large-and-midcap fund may not significantly alter risk-return profile.
- If no, then you can exit the fund and move to another that serves your purpose. This is because the fund in its new form may not have the same risk profile as before, or may not suit your requirements. For example, a short-term debt fund becoming a corporate bond fund or a dynamic bond fund will be a major change as you do not know the kind of maturity profile the new fund will have. A mid-cap fund turning small-cap would be far riskier.
Fund manager changing
The second question – fund manager changes – does not obviously offer the same, if limited, scope for decision-making that mergers do. After all, you don’t know what, if at all, will change in the fund. And therefore, given the uncertainty, the best course of action is to wait.
- If the performance falters, switch to a better option. Underperformance could be due to a variety of reasons and not just the new manager, but unless you understand them or are willing to ride it out, it’s best to move out.
- If the fund’s strategy or portfolio changes, take a call based on the nature of change. For example, a short-term fund taking on higher credit risk significantly alters risk and suitability. An equity fund changing from a value-based to growth-based approach, or a diffused portfolio turning focused all involve changes in risk-return profile. If such changes still fit your portfolio, then you can simply continue to hold it.
What we do when fund management changes
In our fund recommendations, we look for stability in a fund’s strategy and its processes. Where this is clear-cut and defined, a fund manager change does not pose a threat to performance. This is because there is no reason for sweeping changes to be made, nor would it be hard for the new manager to maintain a similar strategy.
With fund manager changes, we primarily watch for portfolio churns. A new fund manager, especially if not from the same house, sometimes likes to tweak the portfolio to suit his/her style.
It is where a fund is entirely manager-dependent that changes are a cause for concern. In such cases, we’d at worst move the fund off the recommended list and onto our watch list. We’d still not give an immediate sell call as we’d watch the fund’s strategy and performance consistency.
What would be some of the key things we watch and what do we do about it?
- With mergers, we look for mandate change, strategy and style of investing. If this significantly changes, we take a relook at why we picked the fund in the first place and whether that holds good now. If not, we move it to a watch.
- With fund manager changes, we primarily watch for portfolio churns. A new fund manager, especially if not from the same house, sometimes likes to tweak the portfolio to suit his/her style. If the portfolio speaks for itself about the new style, we are fine to watch. Else, we speak to fund managers (apart from regular calls to understand their views) to understand the new style and strategy, and the process of choosing/ exiting stocks.
- Armed with this information, we track both rolling performance and portfolio turnover to see whether what the fund manager spelt out as strategy reflects in the portfolio and ultimately in performance. Even here, there could often be periods of underperformance, especially when a fund manager is trying to entirely revamp a poor performing fund. Our call here would be whether the new strategy holds potential to turn the fund around. These calls are not easy to make as the momentum of the old management may help a fund sail (or lag) for a good period of time, before improvement shows up. In those cases, we may only have to revisit it again.
If any of the funds are in our Prime Funds list, we will alert our subscribers if we have any concerns arising from mergers or change of fund managers.
