What to Do When Star Fund Managers Leave

Robert Rodriguez is one of the fund world’s rock stars — a stock and bond picker who’s trounced the market for decades as head of the FPA Capital (FPPTX) and New Income (FPNIX) funds. So it came as a bit of shock when he announced last week that he’d be taking a sabbatical in 2010 and planned to give up day-to-day management of his funds. And it raises a question: Should you bolt if your star manager quits?

In some cases, experts say, investors may want to follow the star out the door. A new management team may change the portfolio’s focus or style, says Morningstar analyst Bridget Hughes, and the star manager may poach the best analysts, leaving only the B-team behind. The risks are especially acute with fund strategies that are the brainchild of the manager and aren’t easily replicated. And investors could get socked with a tax bill as other shareholders flee and the fund is forced to sell winning positions, creating capital gains distributions.

Even if the fund’s strategy stays the same, the new managers may not have that magic touch. Fidelity’s Magellan (FMAGX), for instance, had several terrific years after Peter Lynch left in 1990. But it started to falter in the mid-'90s; manager Jeffrey Vinik moved heavily into bonds, just before a huge tech stock rally, and his successor, Robert Stansky, ultimately trailed the market during his nine years at the helm. These days, Magellan earns just one star from Morningstar and analyst Christopher Davis, who covers the fund, says investors can find better offerings in the large-growth category.

Of course, investors may also be rewarded for giving the new guy a shot. After Tom Marisco left the Janus Twenty (JAVLX) fund in 1997, following a decade of market-beating returns, manager Scott Schoelzel surpassed 98% of other growth funds over his 10 years at the helm, according to Lipper. Granted, Schoelzel put his own stamp on the fund, but he stuck with Janus’s valuation techniques and proved just as savvy a stock picker as Marisco, notes Morningstar’s Hughes.

So should investors stick with FPA? Rodriguez, who’s chief executive of the firm, has told investors he plans to return in 2011, though not as a lead portfolio manager. Several of his lieutenants will take over the funds, he said, applying the same “core principles and strategies” of stock and bond picking. That could bring changes to the portfolio, of course, and there’s no guarantee that the new managers will fare as well. But his successors have been “infused” with his thinking, notes Davis, and investors probably won’t see big changes in the fund’s style or holdings with the changing of the guard. “The force of Rodriguez’s opinions carries a lot of weight,” says Davis. “I can’t imagine him being a shrinking violet, even if he’s not the lead manager.”