Should you sit tight, or follow that star?

A managers' exodus poses questions for investors.
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The Independent Online

The fund manager who created Henderson's Technology Trust, arguably Britain's best performing technology fund, defected from Henderson Investors this week with two other senior colleagues.

The fund manager who created Henderson's Technology Trust, arguably Britain's best performing technology fund, defected from Henderson Investors this week with two other senior colleagues.

The departure of Brian Ashford-Russell is the latest in an exodus of fund managers. So, if you have a unit or investment trust, possibly in an ISA, does it really matter if your fund manager moves?

In recent months Andrew Gibb has left the top performing M&G European Smaller Companies fund, Richard Whittal has announced his departure from Save and Prosper's Japan Growth fund and Justin Seager has quit the management of the Dresdner UK Growth fund. All are deserting large fund management groups to set up their own, more nimble and, for them, more lucrative investment "boutiques."

This leaves the big companies and their customers with a problem. As investment companies have hyped up star fund managers as having the Midas touch, the exit of these individuals suggests investors should do likewise. But if you ask them, they will answer "of course not" - there are plenty of other reasons to invest with a particular company. One said: "In many investment companies, house style is as important as the individual running the fund. So a team person or team would have be trained in the same way as the old one."

But before you decide to stay put, the advice this week from independent advisers is that although there are pitfalls to baling out of a fund, you cannot rely on the new management to create the same promising returns as the stars who have left. You should think seriously about removing your money from such a fund.

In the case of Henderson Technology Trust, experts agree that Mr Ashford-Russell - who set up the fund - and his colleagues were critical to its success. Peter Hargreaves, chief executive of the independent advisers Hargreaves Landsown, said: "All of the managers are going, not just one. Also, you cannot become an expert in technology stocks over night. It takes a long time to build up the contacts and to get a feel for which areas of technology are going to take off."

Investors in Henderson Technology are, in fact, lucky, as its three managers are going to take the fund with them to their new company, although a question mark hangs over whether the trio will continue to play a role in advising on Henderson's other funds.

Other changes of personnel can be less seismic than they seem. Experts agree that technology funds are particularly dependent on the manager. In contrast, funds that invest in blue chip companies leave less room for their managers to make a personal impact. Advisers say that in many cases when one star goes, others who run the fund stay.

Mr Hargreaves also points to the potential pitfalls of panic selling. "The worst thing you can do is rush to sell up. If you do, you will get a bad price." The reason, he explained, is that investment trusts are allowed to move the price of the units in the fund at certain times. This discourages people from leaving the fund, as they will receive a lower price than they could usually expect.

In addition, Mr Hargreaves says, investment and unit trusts are dependent on market values of their stocks. This means, in the case of Henderson, that the resignation of the three technology fund managers would have had a negative effect on some technology stocks, as investors would have known that a larger than normal selling of the units in Henderson's funds would have ensued.

But Jason Hollands, deputy managing director of the brokers Best Investment, is in favour of dumping a fund if the star manager leaves. He says: "There are clear examples of the departure of a fund manager impacting on the performance of a fund. There are also examples of a dog fund turning round under a new fund manager."

He points to the departure of Talal Shakerchi and three members of his European team from Old Mutual in May 1998, leading to a 20 per cent underperformance versus its benchmark index in the eight months following their departure. He also highlighted how the arrival of Sam Morse at the M&G UK Growth fund in April 1997 led to a seven per cent outperformance over the FTSE and All Share in the first six months.

Even John Hatherly, head of global analysis at the investment company M&G, which has not escaped defections, conceded that the resignations of key managers is a blow. He said: "Managing a fund is about experience and flare. It is a science but it is also an art."

One way to avoid the hassle of continually monitoring who is running your fund is to put your money in a passively managed fund, like a tracker. Mr Hatherly of M&G advised: "There is no fund manager who can walk out the door at any moment, and you can get exposure to an efficient market like the FTSE 100 or All Share. There are also lots of examples of fund managers underperforming the index."

This is where a good financial adviser becomes crucial, the experts agree. "Investors do not necessarily know whether a change of manager is going to be good or bad, and they should not change for the sake of it. They should take advice and not act too quickly," Mr Hargreaves said.

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