JonathanBurton

SAN FRANCISCO (MarketWatch) — Jeffrey Gundlach is considered one of the best bond mutual-fund managers in the business, and he’s built a loyal following of satisfied shareholders.

So when Gundlach was fired as chief investment officer of giant fixed-income manager TCW Group and manager of its flagship TCW Total Return Bond Fund TGLMX, +0.10% many investors voted with their wallets and dumped their shares.

Since Gundlach’s departure in early December, about $6 billion has fled the Total Return fund — half of its assets — even though Gundlach has yet to start a competing fund of his own. Total Return’s new management team from TCW unit Metropolitan West Asset Management is no slouch, but loyalty has a high price when a superstar manager is involved.

Buy the manager, or buy the fund? That’s the challenge for investors when a fund manager leaves. A management switch is a red flag, forcing shareholders to play fund detective — asking hard questions, deciphering answers, and ultimately choosing to stay or to sell.

It seems both easier and obvious to side with the manager, who after all is responsible for some and maybe all of the fund’s record. Yet fund companies can dictate a fund’s investment style and strategy and demand that all managers toe the same line, making any transition relatively seamless. Moreover, more firms are shutting down the star-maker machinery that powered them through the go-go 1990s and are instead fielding management teams that might not be affected, positively or negatively, by the loss of one member.

In truth, a fund manager’s departure is almost always a warning, not an automatic sell. While few would question jettisoning Pimco Total Return Fund PTTAX, -0.19% if Bill Gross left the helm or unloading Oakmark International OAKIX, +0.70% if David Herro stepped down, that might be short-sighted. Just as a fund manager would weigh the pros and cons if a top executive exited a company held in his portfolio, you want to be critical and methodical and avoid knee-jerk reactions.

Find out why the shift was made. Was the transition jarring or smooth? A move to promote a talented manager or analyst from within the firm, especially someone who was being groomed for the job, might not be worrisome. Yet if it’s a consequence of poor performance, can the new manager make a difference?

When a manager moves, you have to evaluate it on a case by case basis, said James Peterson, chief investment officer of Charles Schwab Investment Advisory, which manages investor portfolios. I don’t think it’s a slam-dunk to move your money from one manager to the next.

Promising ‘Ps’

The trouble is that evaluation takes time and effort. Most of us would rather be hands-off with our investments, said Christine Benz, director of personal finance at investment researcher Morningstar Inc. All things being equal, you’d rather not be in this situation of having your manager leave.

Since fund managers switch posts about every four years on average, such circumstances come up all too often. Retail shareholders therefore would do well to take a page from the professionals. When institutional investors assess money managers, they focus chiefly on criteria known as the 3-Ps, for philosophy (the firm’s basic beliefs about investing), process (strategy, or how those beliefs are implemented), and people (management, especially fund managers).

Note that another P — performance — doesn’t lead this research. If those other three qualities are strong, it’s frequently a recipe for good long-term results.

Adhering to the 3-Ps involves asking questions of the fund’s current manager. The old manager is history, and frankly, so is the fund’s track record. Right now you want to know as much as possible about the new regime: Will the fund’s investment philosophy shift? Will its process change? What experience do the new people have in running this type of product?

While past performance is not indicative of future results, it’s even less relevant when the management team changes hands, said Standard & Poor’s fund analyst Todd Rosenbluth. You start over to some extent. We punish funds for a manager change, even though that change could be good or bad, but it adds unknowns and that’s a risk people should be aware of.

It’s important to understand how the fund was investing, what their process was, and whether that’s likely to change, Peterson added. If the new manager is going to implement the same process, we’ll hold our investment and watch it.

Of course, finding someone at the fund company to answer these questions isn’t easy. Personal-finance journalists and analysts at Morningstar and other investment research firms can part the velvet rope, but just try getting a response from your fund manager or even an assistant.

Well, it’s worth a try. There are thousands of funds out there, so it’s a smart fund company that makes itself available to an interested investor, especially an informed one. Your investment adviser or broker might have better luck; ask them to telephone or email the fund manager, the chief investment officer, or the public relations department.

We really like it when firms are transparent about their process and their people, Benz said. Shareholders, she added, should ask about the quality and quantity of the new manager’s experience. And ideally look to any investment accounts they’ve run previously for guidance about how your fund is apt to behave under them.

Roll with the changes

Consider Laurent Saltiel, manager of Janus Worldwide Fund JAWWX, +1.23% Saltiel didn’t have much of a track record when he took over the struggling fund in April 2009, but he’d made a strong showing with Janus International Equity Fund JAIEX, +1.20% which he started managing in November 2006 and continues to run.

Saltiel soon revamped Worldwide’s character. He diversified the portfolio to make it less risky, expanding the fund’s total holdings to 90 from about 55 and greatly reducing its concentration in technology and consumer discretionary stocks. In 2009 Janus Worldwide gained almost 38% and beat both its category peers and its benchmark index, which it had lagged for seven consecutive years.

Improvement at Worldwide came quickly, but how long should investors give a new manager to make a mark? Many experts say about a year is fair.

You have to give the new manager time to get the portfolio to what he or she really wants it to be, said Mark Salzinger, editor of The No-Load Fund Investor. For a while it’s going to be a hybrid between the old and the new.

And if you do follow a star manager to new horizons, recognize that loyalty is not an investment strategy. There’s a huge difference between managing money and managing an organization, added Schwab’s Peterson. I don’t think you can necessarily assume that performance is going to repeat.