Photo: Michael Llewellyn

John C. Thompson remembers taking long afternoon drives with his father around his hometown of Madison, Wis., discussing everything from his latest science project to the ups and downs of the stock market. So it seemed perfectly natural when he joined his father at Thompson Investment Management in the mid-1990s and started feeding him ideas on stock picks. It was even better a few years later, when his father made him comanager of Thompson Plumb Growth fund and its performance blew past rivals . He was a good person to work for, and it worked out well, Thompson says of his early years at the firm.

Today both father and son tell a much different story. It was a family nightmare, says the elder Thompson. The duo began to differ over issues like the fund s investment strategy and how to promote the fund. Performance began to suffer, and the fund started to lag behind its competitors. By the time John W. Thompson nudged his son aside, Thompson Plumb Growth had lost hundreds of millions of dollars amid the financial crisis. These days they are barely talking.

As mutual fund investors grapple with hard-to-fathom fees, volatile markets and a decade of ho-hum returns, here s something else they might add to their due-diligence questions: Is the manager about to call it quits? A little-noticed combination of demographics and postcrash angst is spurring manager turnover, and with that comes the risk of upheaval for smaller funds and their investors. While large fund families like Fidelity and Vanguard command lots of attention and a majority of fund assets, there are still more than 4,500 funds with assets of $550 million or less. Many of these firms are led by lone rangers who got their start as the fund industry was taking off in the 1980s and who are now nearing retirement age. Some experts think the recent market turmoil will lead more managers to throw in the towel over the next few years. That s because after tough spells in the market, some managers tend to stick around just long enough to right the ship and then they leave. According to fund-research firm Morningstar, after the recession and dot-com bust at the turn of the century, fund-manager turnover jumped from 24 percent in 2003 to 39 percent three years later. Fast-forward to the present, and fund managers on the fence about retirement may look to get out when things return to some level of normalcy, says Adam Bold, founder of the Mutual Fund Store, an investment advisory firm.

As any small-business expert can attest, passing the baton to the next generation is rarely easy. But when the business is a mutual fund, the hazards multiply. The records of the founders and their successors are available for all to see in funds daily pricing and in the constant rankings and comparisons of funds. Even a slight switch in investing strategy can throw off a fund s performance and toss a monkey wrench into the investment plans of longtime shareholders. Stir in unpredictable outside forces recessions, credit squeezes, bear markets and the pressure can be overwhelming. It s complicated to say the least, says Paul Karofsky, director emeritus of the Northeastern University Center for Family Business. If it doesn t work out, is Dad going to fire his son?

A jagged transition can be bad for business at funds of any size. After TCW Group ousted popular bond manager Jeff Gundlach late last year, customers yanked $1 billion from the total Return Bond fund in the days following the announcement.

At the same time, some investment firms are starting to plan ahead. In May, Legg Mason said Sam Peters will join veteran manager Bill Miller this fall as co portfolio manager at the Legg Mason Value Trust fund. At Paradigm Capital Management, the mother-and-daughter team of Candace and Amelia Weir spent hours on long walks over two years, discussing an exit plan if working together didn t work out. If one of us hated it, we would hug and go our separate ways, says Candace, chief investment officer of the firm, which has $1.7 billion in assets.

We checked in with three family-run investment firms in different stages of the succession cycle for lessons in what can go wrong and right when the family business changes hands.

The Thompsons

Photo: Kevin J. Miyazaki / Redux

In hindsight, it s easy to see that the Thompsons weren t on the same page when it came to managing their Thompson Plumb Growth fund. As the fund s strong performance after the dot-com bust attracted attention, the younger Thompson stepped into the media spotlight to talk up his stock picks. His father, a mild-mannered son of a dairy farmer, admits now that he was disappointed in his son s boldness. If he weren t family, I would have pushed him out, he says of his son s move to center stage. It made me sick, actually. For his part, John C. says the fund needed to find ways to stand out from the competition in an increasingly crowded fund universe. Without a brand name or big distribution, we had to do something to attract assets, he says.

Then there was the matter of managing the portfolio. As the younger comanager started to call the shots sometimes trading stocks and telling his father afterward the tension increased. As a way to distinguish the fund, John C. favored much more concentrated bets over the more diversified approach his father had used for decades. But in 2007 and 2008, concentrated investments in financial giants like AIG and Fannie Mae began to backfire. As the fund s performance fell to the bottom tenth of its category, the board turned up pressure on the elder Thompson, now 66, to do something. He felt caught between their pleas and wanting his son to be right. They always say, if you are going to pass the baton, you have to let them hold it, he says. And be close enough to grab it back if it hits the floor.

The baton didn t just hit the floor. It crashed. The double whammy of a tumbling market and fleeing investors sent assets to about a tenth of the 2004 peak of $1.5 billion. It was a classic succession nightmare: disagreement over strategy and who is boss, aggravated by the biggest financial crisis since the Depression. It s unsettling for investors, says Morningstar analyst Courtney Dobrow, who notes that the fund has yet to see a significant increase in assets. The elder Thompson instituted limits on how much the fund could invest in a single stock or industry a not-so-subtle slap at his son s strategy. His son left, and the elder Thompson retook the reins in early 2009, hiring two others to help him revive the portfolio.

After leaving the firm, John C. tried running a mortgage-insurance business but is now starting up a money-management firm. The father-son relationship, which had started to mend, is tattered once again. John C. says he s upset his father didn t ask him to return and run the firm s successful bond fund when the mortgage venture didn t work out. Even more upsetting was the elder Thompson s decision to sell a stake in the firm to his new partners without offering it to his son. I m in a bit of shock over it, says John C. Still, he says if he could do it over again, he wouldn t do anything differently. Whether I inherit a penny or not, I don t care, he says. I got a lot of good experience. The elder Thompson says selling a stake to his partners was a way to keep their interests aligned with the fund, which has been doing better lately. At the same time, he says he s cheering his son on in his new investment business. What parent doesn t want their child to succeed? he asks.

The Hodgeses

Photo: Michael Thad Carter

Growing up in Texas, Clark and Craig Hodges did what brothers everywhere do: They fought. As adults, working with their father, Don, at his Dallas investment firm, they found new things to squabble over, most of which had to do with office politics. I wanted to establish myself, and every step of the way I was running into the fact that my brother had already done what I was trying to do, says Clark of the challenges of entering the family business.

To get a better sense of whether he wanted to be in the family business, Clark eventually quit and joined a brokerage firm on the other side of town. There were some hurt feelings and some questions about why he would turn his back on us, says Craig. But looking back, it was the right move. That s partly because while Clark was away, he found he was more interested in the business side than in investing. When he returned to the family business two years later, he carved out a role in marketing, which he now heads. Craig sticks to the stock picking with his father, and his sister, Camille, is in charge of compliance. We have learned to stay out of each other s way, says Craig.

It also helps that Don isn t inclined to second-guess them. You only learn by doing, say the 75-year-old, whose firm manages $750 million, including $362 million in the flagship Hodges Fund. Craig, 46, and his father both like stocks with good growth prospects. Craig is drawn to technology firms like Apple or hip retailers like True Religion Apparel, while Don favors the steel, railroad and restaurant industries. Their contrarian strategy can lead to periods of underperformance, but over the last year they are in the top 11 percentile of their category.

Don says he has no plans to retire soon, and his kids who each own a piece of the business appear to be on the same page. Still, the fund s broadly defined strategy could pose a risk for investors at succession time. While that breadth gives its managers the freedom to go anywhere for a good investment, it also means the fund could look different after Don leaves, says Morningstar analyst Ryan Leggio. For his part, Clark is fine with leaving big calls to his older brother. Prince Charles has two sons, and guess what, he says. The youngest is just out of luck.

The Weirs

Photo: John Loomis

When Candace Weir hears that the CEO of a company she follows has chosen his son or daughter as chief financial officer, she has second thoughts about the investment. I m a real cynic of nepotism, says the founder of Paradigm Capital, which manages money for both institutional clients and mutual fund investors.

So when her daughter, Amelia, expressed interest in working at Paradigm, the 65-year-old didn t take the discussion lightly. The pair had long talks about what could go wrong. And before Amelia signed on as research director and comanager of Paradigm s hedge fund, they agreed to be brutally honest with each other and to quickly address any issues that could lead to resentment on either side.
Of course, it s one thing to talk about potential issues and another to confront them. And now that Amelia, 35, is a key part of the firm, she s learned to be a little pushy. So when her mother forgets to invite her to participate in phone calls with executives of companies whose stocks they own, Amelia asks to be included. In meetings she often finds herself being more forceful than she normally would be so she can get a word in while her mother is charging ahead on a point. I have to really lobby for myself, she says.

Like any experienced investors, mother and daughter sometimes disagree on stock picks. When Candace wanted to sell fertilizer firm Terra Industries after its stock price began falling, Amelia held her ground. (The stock nearly doubled from its low, and the company was recently purchased by CF Industries.) Candace, meanwhile, held on to retailer Build-A-Bear Workshop because she liked its management and strong cash flow, even though Amelia wasn t crazy about the idea. Candace was right, says Amelia, noting that the stock is up. One of us eventually defers to the one who has the expertise.
To outsiders, that kind of talk sounds like a successful succession plan in the making. But the Weirs insist it s not a sure thing, especially since they ve only been working together for two years. It s absolutely not in stone, says Amelia.