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What should you do whenyour manager leaves?

Following a dismal 2008, the region's fund investors have had some relief in 2009. Equity and mixed asset funds were the best performers of the year, gaining 44.11 per cent and 23.56 per cent respectively, according to Reuters' Lipper Research. Funds registered for sale in the Gulf gained almost 33 per cent while they lost 34 per cent the previous year. Real estate funds were the only asset type posting a negative annual return, losing 5.49 per cent.

A large part of the credit for funds riding out the storm should go to the manager and his team. After all, in many cases, funds stand or fall depending on the manager's strategy.

As the still nascent fund industry of the region matures, an important factor for the investor to consider is what he should do when the manager of his portfolio leaves. Should he stay behind with the manager's old firm or migrate with him?

Without any available hard data, it is difficult to assess the fund manager turnover in the region, especially when the performance of funds in the past two years has been heterogeneous throughout the region, reflecting the economic and market opportunities and challenges.

But, as one manager of a private boutique asset management firm said, it has been relatively modest recently because of the limited number of new job opportunities that have been created.

"Although staff turnover that is initiated by the company may increase during difficult times, most turnovers are a function of the employee's decision to leave," said Paul Cooper, managing director of Sarasin Alpen & Partners, Dubai.

"If there are only a few new funds being launched, which [has] been the case recently, or the size of existing funds has not grown sufficiently to justify taking on new people, then the number of new job opportunities is limited and staff turnover will typically be low," he added.

Modest turnover or not, there is a consensus among analysts and managers that the departure of a manager should be taken seriously. After all, with the exit, there is some disruption. The impact might vary and one should not assume that it will be negative. So rather than jumping the ship hurriedly, the client should be cautious, checking out how the fund performs in the next few months and then deciding whether to continue or move.


"When a fund manager leaves, you should look at the reasons for him leaving and find out as much as you can about the incoming fund manager," said Dan Dowding, senior executive officer at Killik and Co., Middle East & Asia.

Cooper agreed but pointed out, it may not always be easy to get information from the company.

"The client should immediately review his or her investment and speak to the company to determine the reasons for the manager's departure, though this is often difficult, and [seek] to ascertain the company's strategy regarding his or her replacement," Cooper said. "Will it be an internal candidate from the existing team or an external hire from a different company?"

In the case of a star performer departing, loyalty of clients is likely to change.

"If a star fund manager leaves a fund, and if that fund manager leaves to set up a new fund, or join a new house, loyal longer-term investors are likely to liquidate their positions and follow the fund manager," Dowding said.

"The higher the historic return the manager has produced, the bigger the impact is likely to be."

But it could very well be that the manager is forced to exit because of poor performance. And, it's also not untypical for fund houses to run with a strategy of joint fund managers running a fund that clearly lessens the impact when one of them quits.

Cooper listed some issues to consider when evaluating a fund that has lost its captain: the size of the team, the length of the time the fund manager was in place, the performance of the fund during his or her time in charge and, if possible, an understanding of his day-to-day roleuwhether the manager was more hands on than others.

"It is also important to understand the investment process, as some provide limited scope for the fund manager to add value, while others give the fund manager full discretion over all investment decisions," Cooper added.

Finding out the answers to these issues is not always straightforward. So, the client should at the very least monitor the fund's performance closely in the following weeks and months, he said.

"It may take some time before the impact is clear but if the client becomes uncomfortable with the performance or the company's response to the departure of its fund manager then he may be advised to look elsewhere," Cooper said.

For Killik and Co., it's not very different either. Typically when a fund manager leaves a fund and if that fund happens to be one of their core funds or on their buy list, the recommendation is hold but followed by some rigorous activity.

"We then will arrange to meet with the new manager without delay and start our due diligence process again," Dowding said.

"We will look at his experience, his track record, get to understand his economic and market outlook, as well as get an understanding of how he intends to change the portfolio, if at all," he added.

"Assuming the responses meet our rigorous criteria, we will then maintain the hold recommendation for a period of approximately three months u during which time we will be closely monitoring the performance. Underperformance is likely to result in a downgrade to sale after this period, or before if the drop in performance is more pronounced," he said.


In the wake of a performing manager's exit, there's a distinct possibility of a large chunk of clients following him. That would mean encashment of units leading to negative effect on the existing fund.

"When units are encashed, the new fund manager has to start selling down the portfolio to meet the redemption payments," Dowding said.

"If there are a significant number of redemption requests, the manager may have to start selling down his more liquid and favoured positions, resulting in an unbalanced and in extreme cases a more illiquid portfolio," he said.

"A fund manager's job is much easier in an environment of net inflows, rather than one where he is experiencing net out flows, which explains why new funds typically outperform during the period after initially being launched," he added.

In addition to performance, a key criterion for a fund to be on Killik's list is the fund manager's commitment to his fund.

"In this respect, we generally like to see that a fund manager has a large percentage of his wealth invested in his fund. Clearly there are some exceptions to this rule, but having the investors' interests aligned with those of the fund manager is a very attractive proposition," Dowding said.

Finally, clients should remember manager switch has an implication on their bottomline.

"Clearly when switching funds there are costs involved, so these should also form part of the investor's decision-making process," Dowding said.

Equity Funds: Equity funds registered for sale in the GCC lost momentum during last quarter 2009; they gained only 2.63 per cent, compared with the double-digit returns recorded during the second and third quarters. Globally, equity was the best asset type performer during 2009, increasing 44.11 per cent, which contrasted with the minus 47.73 per cent return registered the previous year. The 69 Lipper equity categories posted positive annual performances for 2009, with the exception of the 39 funds invested in Kuwait listed by Lipper, which continued their collapse during last quarter 2009 and lost 18.13 per cent on average during 2009. The weak performance recorded by the Kuwait Stock Exchange, losing 13.27 per cent during the year, explained this tumble. Funds invested in basic industries ended the year in negative territory, losing 7.55 per cent.

As noticed in international markets, funds invested in emerging markets topped the annual ranking: equity Russia increased a whopping 159 per cent, Equity Indonesia rose 124 per cent, and Equity Emerging Markets Latin America gained 104 per cent. Funds invested in the GCC lost momentum during last quarter 2009: Equity UAE plummeted 16.35 per cent, Equity Kuwait lost 17.50 per cent, and Equity GCC decreased 8.44 per cent, mainly because of Dubai World's debt restructuring, moving back their annual performance in the total rankings.

JPM Russia A Acc USD was the best performing fund registered for sale in the GCC over the year, increasing a little more than 164 per cent. Fourteen of the twenty top-performing funds available for sale in the region were unsurprisingly invested in emerging markets, notably Russia, India, and Indonesia. Sectorbased funds were also present in the top rankings, particularly funds invested in information technology and pharmacy & health as illustrated by Franklin Infotech Fund-Growth, which recorded an annual performance of almost 148 per cent.

Focusing on GCC-domiciled funds, the situation was similar to elsewhere, with funds invested in emerging markets topping by the rankings: Equity Emerging Markets gained 75.63 per cent, and Equity Asia Pacific ex Japan rose 62.24 per cent. Among GCC markets, the 46 funds domiciled in the region listed by Lipper and invested in Saudi Arabia were the best performers, increasing 30.44 per cent on average during 2009 as they benefited from the Saudi Tadawul All Shares annual performance of 27.54 per cent u the best performing of the seven regional markets. SHC Saudi Equity, managed by Saudi Hollandi Capital, was the best performer among Saudi funds, gaining 48.32 per cent during the year.

Bond Funds: At the start of the year, the bond market was marred with uncertainty with the debt restructuring exercise pushing up yields to extremely high. Institutional investors were the first to take advantage of the unique opportunities to invest in bonds with a risk-reward relationship, which reflected excessive pessimism in the market. Indeed, investors were able to allocate their funds between all segments of the bond markets, from the high-yield market to the best rated corporate bonds, while government bonds continued to attract monies as safe-heaven investments.

However, later in the year the market was severely hit by the repayment postponement of some Nakheel bonds, reviving concerns on the consequences of the debt restructuring on companies but also on states, since Dubai World is a GRE. Bond funds increased 16.07 per cent over 2009, recording an impressive jump compared to the minus 10.19 per cent return posted the previous year, mainly on market conditions improvement. Globally, high-yield categories topped the ranking, benefiting from spread tightening.

Islamic Funds:The 214 Sharia-compliant funds covered by Lipper and registered for sale in the GCC increased 12.5 per cent during 2009, representing a great improvement compared to the minus 28.57 per cent return recorded the previous year. However, this jump was minimal compared to that of conventional funds registered for sale in the region, gaining almost 36.50 per cent after a severe tumble of 35.64 per cent during 2008. As already mentioned in our previous report, Islamic funds cannot benefit from the spectacular rise of emerging markets, since they do not invest heavily in those markets; they are much more focused on the regional GCC markets, which witnessed a tough last quarter 2009.

Unsurprisingly, equity funds and mixed-asset funds were the best performers, gaining 18.48 per cent and 14.07 per cent on average, respectively, during the year. On the other hand, real estate funds ended the year in negative territory, losing 9.76 per cent over 2009. Equity Kuwait was the worst performing Lipper category; it decreased 23.04 per cent, mainly because of the negative performance of the Kuwait Stock Exchange (minus 13.27 per cent) over 2009. Caam Saudi Fransi AlFursan BRIC Equity Trading was by far the best performing Sharia-compliant fund during the year, gaining an astonishing 106.11 per cent.

As suggested by its name this Saudi-domiciled fund managed by CAAM Saudi Fransi benefited from its significant exposure to the equity markets of Brazil, Russia, India, and China.

Performance of Funds in GCC:Reuters Lipper Research


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Publication:Gulf News (United Arab Emirates)
Date:Apr 10, 2010
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