Hardly a day goes by when a fund company doesn’t announce that one of its funds is changing managers. Often, you won’t know it until you get a notice in your mailbox or an announcement in your email.

So what should you do? Sell the fund or stay the course? What questions should you ask?

“The two biggest questions you should ask are: First, what’s the new manager’s background and track record? And, second, are they changing the strategy, and if so, what does that mean for my portfolio?” says Russel Kinnel, director of fund research at Chicago-based fund tracker Morningstar.

Whether a portfolio manager change is a good or bad thing for a particular fund is not always readily apparent to investors. If you’re unsure whether to pull the plug, Kinnel recommends you check back at least a couple of times after the change.

“You want to see what’s going on a year after the change because these changes can be subtle, and sometimes fund companies aren’t that good at communicating what’s going on,” says Kinnel. “You want to assess, ‘Is this a good manager? Is this a strategy I still like?’ And if you’re not happy, you can look and see if there is something better.”

A good fund manager change

In the case of a manager change at Fidelity Dividend Growth Fund, you would have been wise to stick with the fund, even though the new manager, Larry Rakers, dramatically changed the fund’s strategy when he took over in 2008 from previous manager Charles Mangum, according to Kinnel.

“It was definitely an upgrade,” says Kinnel. “Dividend Growth had been sort of a megagrowth high-quality fund, and under the new manager, it became more widely dispersed across the style box,” Kinnel says, referring to the Morningstar grid that identifies style on a spectrum from value to growth, and small- to large-capitalization stocks. “Rakers has done a good job since, so you’d have to say it was a positive.”

Investors should be especially on their guard when star-driven funds change managers, and assess the change carefully, warns Michael Iachini, managing director of ETF research at Charles Schwab Investment Advisory, an independent affiliate of Charles Schwab & Co.

“Star-driven funds are often built around the genius of an individual, and if that fund loses that portfolio manager, that’s going to be a problem for the fund,” says Iachini.

Iachini cites as an example Fidelity Magellan Fund, which was a great performer under legendary manager Peter Lynch. Lynch stepped down in 1990 after a 13-year reign in which the fund had averaged a 29 percent annual return, according to Fidelity Investments. The fund’s reputation over time helped its assets grow to $100 billion, but it has since struggled, shrunk in assets, gone through several managers and lost much of its luster.

Sizzling funds can go cold

Bill Miller, star manager of Legg Mason Capital Management Value Trust fund, posted an industry-record streak of beating his benchmark, the Standard & Poor’s 500 index, for 15 straight years between 1991 and 2005.

“But since then, the fund’s performance has been awful,” notes Morningstar analyst Bridget B. Hughes in a report. She has had a negative rating on the fund since November 2011.

Indeed, investors joining the fund in early 2007 based on that record would have suffered a 6.7 percent loss that year, followed by a whopping 55 percent decline in 2008. Further indicating that past performance isn’t a reliable guide, the fund was up almost 41 percent in 2009, up nearly 7 percent in 2010, and down 4 percent in 2011. Miller recently retired as sole portfolio manager.

Other funds are team-managed or are managed with more of a quantitative process or some other defined process. So losing one member of the team is not as great a cause for concern, says Iachini.

Harbor International Fund lost its star manager, Hakan Castegren, who died in 2010. He is credited for being the fund’s sole manager between 1987 and early 2009, when four co-portfolio managers joined him to run the fund using a team approach. But fund literature indicates that the four managers served in a supporting role for many years before the official change.

“The process didn’t change that much; the transition was more subtle,” says Kinnel.”The people who replaced Castegren are very experienced. It represents why you don’t automatically sell a fund because of a manager change.”

Gradual fund manager changes

One way to implement a change in portfolio management is to do so over time. A planned transition allows for less disruption and better training of the managers who will ultimately run the fund.

A case in point: Thornburg International Value fund, founded by Bill Fries. “Despite William Fries’ relinquishing portfolio management responsibility for the majority of his fund’s assets to Wendy Trevisani and Lei Wang, we told our clients to hang onto the fund,” said Aaron Skloff, CEO of Skloff Financial Group in Berkeley Heights, N.J.

They were rewarded as Trevisani and Wang, who were promoted from associate portfolio managers to portfolio managers in 2006, have continued his legacy of strong performance. Meanwhile, Fries (now in his 70s) manages a minority of the assets.

But some financial experts believe a new manager isn’t going to stray far from the benchmark it’s trying to beat. So basing a decision on the manager isn’t as important as basing it on the strategy of the fund.

“Most new managers are looking to add a little bit of ‘alpha,’ or outperformance, above their benchmark,” observes Randy Warren, chief investment officer of Warren Financial Service, a registered investment advisory firm in Exton, Pa. “The new manager isn’t going to stray very far from his benchmark, so picking a fund that has the right benchmark can have a bigger impact on your return than picking the right manager.”

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