BetterIR Spotlight: Changes in Portfolio Management

Every once in a while on the blog, we’re going to highlight a particularly compelling piece from our BetterIR newsletter. This month, we look back at a piece from January, which covers changes in portfolio management and how an Investor Relations team can better understand, and take advantage, of them.

From January 2014’s BetterIR: Understanding Your Exposure to Changes in Portfolio Management – Opportunities for Fund Focused Outreach

Unforeseen market events can take an investor relations team by surprise. Whether it is a market macro occurrence that is impacting a large universe of stocks or something more firm specific, investor relations needs to figure out the right approach for timely outreach.

One such event that tends to occur fairly frequently is a portfolio management change. Mostly due to a fund’s under performance or a manager switching firms, the change can have substantial impacts on the issuers held in the portfolio. Knowing about such a change can be very valuable for the IR team, while understanding the potential impact can aid in preparing strategic outreach. The obvious risk is that an existing position in the portfolio will be reconsidered and could even be sold. However, there is also something to be said for the opportunity such an event presents. The new manager, as well as potentially the manager that left, will have access to capital that could be used to purchase your stock.

While a fund’s management may change for various reasons, some generalizations can be made around the
impact. A paper presented by the Center of Finance and Banking from the Justus-Liebig –University examined the affect a management change has on a fund’s performance. The authors conclude that underperforming funds, which are experiencing a management change and net asset outflows, perform by about 2.4 percentage points better in the following year to underperforming funds that do not experience those two effects. It seems that new management is able to refocus the portfolio and look at existing positions from a new perspective. This is likely due to the fact that management is starting with a new P&L and finds it easier to sell underperforming positions. In a market where active managers are under heavy scrutiny for net-to-fees returns, management changes are even more likely to occur.

Read the full piece, and other articles from our January issue, on Ipreo Ink.