How takeovers and fund managers moving out affect your investments

29 August, 2007:

Even as the mutual fund industry is growing, it is also witnessing takeovers and fund managers moving in and out. The mergers also see consolidation of funds within the fund house. These events put mutual fund investors in a dilemma. They are riddled with many doubts. Will the new management be as good as the old one? Will the same people manage the money and continue their current investment style? It is even worse, when a high profile fund manager moves out. Should you follow him?

The answers to these questions depend on the functioning of the new management. Sure, nothing stops the new management from changing the investment style. That can be for better or worse. Only the result will prove it. The same applies to the new fund manager, too. Who knows, he may prove dependable.

To begin with, ask whether the new managements meet the necessary requirements. Do they enjoy a clean reputation and boast of a good fund managing track record? Also, find out whether their style of fund management complements your risk profile. Does it have the process and systems in place? It is very crucial that your investment profile and the investment approach of the new management matches. For example, your may have chosen the earlier fund because of their conservative investment style. However, the new management may have an opposing approach towards investment.

A case in point is the merger of Sun F&C mutual fund and Principal mutual fund schemes. Most Sun F&C fund investors were happy about the merger, as they felt they were moving into a better-managed fund. Their assessment was right because Principal mutual fund is know for striking a balance between risk and returns in its investments. Even for the Principal investors the merger made a lot of sense because the asset base of the fund doubled after the merger. Asset base is crucial in mutual fund business.

The next task is to assess the implication the merger or consolidation will have on your investment. Is the new management going to continue with the scheme of your choice? Are they going to consolidate the scheme with another scheme they have in their portfolio? If there is a consolidation of schemes, you have to closely follow the tax implications and future plans of the scheme.

For example, if the mutual fund treats the merger as redemption of old units and fresh purchase of new units, you may incur capital gains tax. The problem is you do not have a choice over the issue. Regardless of whether you opt for merger or not, you have to face the tax implication.

Another important point to note is whether there are any significant changes in the cost involved. For example, when Franklin Templeton merged two of its schemes sometime back, it was met with protests from some quarters. The main criticism was that there was a huge 50 basis point gap between the expense ratios of both funds. Some people felt that they are moving into a high cost fund.

Fund managers leaving funds are new phenomenon Indian mutual fund investors have to learn to live with. You do not have to hit the panic button right away. Sure, every individual is unique and the same is true for fund managers, too. However, fund managing is not such an individual game. Mostly, the institution may have put a system in place and fund managers operate within it. Reputed institutions have also made fund managing a team effort. Therefore, chances are that the fund may continue to perform the same.

However, it is not to deny individual stories. This applies to fund managers who spot growth stories ahead of their peers in the market. These individuals may identify sectors, which are poised to take giant leaps. This is one sure way they can beat their competitors as well as market benchmarks. Such individuals are worth following if your fund house fails to find an equally competent replacement.