Should You Follow Your Fund Manager?

Recently, C.I. Mutual Funds has pulled another big coup. Derek Webb, former manager for AIM Funds, has signed on as the latest fund manager for C.I..

Derek Webb has been one of the hottest managers on the street with his unique quantitative earnings momentum based management style. Peter Anderson, President of C.I. Mutual Funds Inc said “This is a further opportunity to continue adding depth to our already strong line up of Canadian and Global portfolio managers. Derek’s long term track record speaks for itself.”

C.I. and AIM are currently under some lawsuits but it is speculated that Derek will assume the management of the C.I. American fund along with some newly launched funds by C.I. to take advantage of Derek’s earning momentum based management style. Webb will continue to be based in San Francisco.

Once again, this brings up the question for unit holders of the AIM Canada Growth, AIM Canada Income, AIM Global Theme and the AIM Natural Resource funds of should you stay where you are or should you follow the manager.

Taking a look at the past for answers

One of the options is to take a look at other management changes in the past and see how investors have fared. Some of the more notable changes have been Gerry Coleman from the Mackenzie Ivy Funds to the C.I. Harbour Fund, Dina Degeer and Dennis Starritt from Trimark to Mackenzie and more recently, Kiki Delany and Lynn Miller from Spectrum to Trimark. Here’s how the numbers looked to the end of May, 2000:

On a Calendar year basis, the numbers look as follows

What can we determine from this past data? Inconclusive results. The old fund Spectrum Canadian Equity has marginally outpaced the new Trimark Fund run by Kiki Delany. In the other two examples, the new fund marginally outpaced the old fund.

What can we learn from this?

Unfortunately, there is no clear formula to determine whether investors should follow a manager or just stay put. However, we can offer a number of important factors to consider when you own a fund where the manager has just left.

1. Who is replacing the fund manager role?

You can guarantee that when a company loses a ‘Star’ manager, they are not going to sit and do nothing. Their first responsibility will be to put someone competent into the role. Often the new manager will also have a track record that must be considered before any hasty decisions. Other questions include: what are the holdings and what is the likelihood of any major changes to the holdings. Significant changes might signal a deeper analysis of whether there is a fundamental change in the strategy, mandate or discipline of the fund.

2. Are there any costs to switching fund companies?

Many mutual funds are still bought on a deferred load basis. If this is the case, you must determine whether the cost to move is a reasonable one. Do you think the new fund will outperform the old one enough to justify the cost? If there is a DSC still on the fund, determine what it will be. The closer you are to the end of the schedule, the smaller the cost. Still, you have other options. Sometimes your financial advisor might be willing to pick up the cost of the load on the premise that you will go into the new fund on a DSC basis. The downside of course is you start the DSC period all over again. Obviously, if you bought the fund on a front end or no-load basis, the fees do not apply unless there are transaction costs. Generally, these are pretty negligible.

If the funds are on a DSC basis and you feel the need to get out of the fund, take a look at some of the alternative funds within the existing family. Most companies nowadays have tremendous product depth and you can generally find some alternatives.

3. Is there any tax implications to switching fund companies?

If the funds are inside an RRSP, this issue does not apply. But outside the RRSP, you must take into consideration any tax implications of selling and buying. Everytime you buy and sell, you trigger a disposition which means that any gains you might have made become taxable. I have seem some situations, when the tax bill can be pretty significant, especially if you have held a fund for a longer than 5 year period. Don’t necessarily avoid switching just because of the taxes. Most accountants will probably tell you if you have a lousy investment, sell it regardless of the tax.

On the other hand, what are the advantages of moving to a new smaller fund without and unrealized capital gains or tax liabilities? Eventually most funds with a longer-term track record will build up tax liabilities.

Be sure to take the time to analyze your tax situation before you make any quick decisions. This advice could save you a bundle!

Back to the current issue

Current holders of any of the AIM funds previously managed by Derek Webb should use caution before making any hasty decisions. I think the questions that needs to be answered are: Who owns the track record? The fund or the manager. Was it the manager that created the performance or the discipline? What is the relationship between the manager and the discipline? In Webb’s case, much of the analysis was quantitative and computerized. Who owns the model and the systems? What about the support people – are they staying with AIM or moving to C.I.? Are they integral parts of the discipline?

Unfortunately there are no answers here yet. Talk to your financial advisor and/or accountant. AIM has already announced the new managers that will be overseeing the responsibility of running the funds.

AIMs case for investors to stay is that all funds were managed by a team rather than an individual. Derek Webb was the profiled lead manager. In addition to that, Derek managed the fund with a quantitative computer model, which will still be used to manage the fund. Some fundamental changes have been made to the funds but most of these changes result in more conservatism. All of the funds will be managed with a team approach offering different viewpoints and styles of management.

For more information, we offer a list of the changes at AIM and a biography of some of the lead managers.

In conclusion . . .

My favorite words! Remember that no one can accurately make predictions except in hindsight. Only the future will tell us if Derek Webb will out perform the AIM funds he is leaving. Rather than try to predict the future consider the cost of making changes either as a result of fees or taxes. This is far more important than investment merit. History has shown us that it probably won’t hurt you to take your time when making this decision.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

One Response to Should You Follow Your Fund Manager?

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