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Should You Sell When Your Fund Manager Quits?

So, the star manager of your mutual fund leaves. Should you bail, too?

Investor analyzing

It’s a question on many investors’ minds now after famed bond manager Bill Gross announced Friday he was leaving the company he founded, Pacific Investment Management Co., to start another fund at rival Janus.

The Wall Street Journal reported today that investors so far have pulled $10 billion out of Pimco —  and $90 billion more may follow.

“You have to be careful not to have a knee-jerk reaction,” says Sarah Bush, a senior analyst with Morningstar, a Chicago-based firm that rates mutual funds. “In many of these cases, and certainly true of Pimco, these have never been a one-man show.”

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Funds may have many resources and people contributing to its success, so the loss of a top manager has less of an impact, Bush says.

Morningstar has placed Pimco funds — including the flagship Pimco Total Return Fund held in many 401(k) plans — under review until it can assess the management team taking over.

Often when star managers leave, they are either at the top of their game and the money naturally follows them, or there has been some discord and they exit with a less than stellar record, says Jeff Tjornehoj, senior research analyst with Lipper, which tracks funds. The latter is the case with Gross, whose reportedly erratic behavior left him on the verge of being fired, Tjornehoj says.

(Gross’ departure also follows recent news that the Securities and Exchange Commission is investigating whether an exchange traded fund he managed inflated its returns.)

The Pimco Total Return fund, which had phenomenal performance over many years under Gross’ management, had suffered of late, Tjornehoj says. For the year ended in August, Pimco Total Return gained 6.1 percent, compared with 7.1 percent for its peers.

Investors who stuck with the Pimco fund through its weaker returns might want to stay put until they see how Gross’ replacement performs, the analyst says.

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Workers who invest in a Pimco bond fund through a 401(k) plan might also want to stick with the fund if they have few alternatives or don’t want to throw their asset allocation out of whack, Tjornehoj says.

Kirk Kinder, a financial planner with Picket Fence Financial in Bel Air, Md.,  says investors should think about why they own a fund in the first place before bailing in a management shift.

“If you bought the fund only because you liked the manager, than if the manager goes, you should think about selling it,” he says. Ideally, though, you would buy a fund because you like the investment team and the company overall, he says.

Besides, investing based on a star manager alone can backfire. Many may recall Legg Mason manager Bill Miller, who grew to fame for beating the stock market 15 years in a row until 2006. His performance then tanked and investors pulled billions out of his Capital Management Value Trust fund, which he no longer manages.

Bill Greiner, chief investment strategist at Mariner Wealth Advisors in Leawood, Kan., says his firm usually stops investing new money in a fund after its top manager leaves, while weighing whether to stay invested or bolt.

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Mariner originally invested with Pimco because it is the largest bond manager, had stable management and had funds with a strong track record, Greiner says.

After Mohamed El-Erian resigned as Pimco’s chief executive and co-chief investment officer earlier this year, Greiner’s firm waited a few months before slowly liquidating its position with the firm. The concern was that Pimco would be distracted by the loss of a key executive rather than focusing on the investments, Greiner says, which he sees happening now.

Mariner had more than $100 million invested in Pimco earlier this year, and now has less than $50 million, he says.

Photo: IvanBliznetosov/iStock

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