Does Management Tenure relate directly to fund performance?

Mutual fund investors have several aspects to consider while selecting a fund, such as investment style, expense ratio, sector focus and the role a fund in an individual’s portfolio and the reason behind the investment. So in an environment where most of the mutual funds employ an active management investment style, how critical and important is a fund manager?

To analyse this, fund manager’s management tenure for the fund and returns generated in that period may be an effective aspect which can give an investor an overview of the fund manager and its investment strategies. Management tenure is nothing but the length of time that a manager(s) has been controlling the mutual fund scheme. A long-term fund performance record, preferably of three to five years, is a key indicator of a fund manager's investing abilities.

Mutual fund manager tenure is considered to be as a parameter by many investors as the fund manager have the ability and ultimate control to change strategy. A fund manager’s job involves the decision making for the investment of the asset/money employed under the fund. This is done by a thorough analysis of company’s financials, meeting with management and comparing the company with its peer companies. Moreover, the fund manager decides on the strategy of the fund to achieve its objective.

The fund management tenure suggests the ability of fund manager while dealing with the positive and negative market conditions. The fund manager with a long history backed by an efficient research team in a similar fund is considered to be an advantage, but it can’t be a predictive measure for an investment decision. As a newly introduced fund manager with a short history with a particular fund may outperform his abilities and skills. Investors are advised to compare the returns pre and post appointment of such fund manager and then come to a conclusion on the investment decision. 

To analyse the relation between management tenure and returns or fund performance we have analysed 126 equity mutual fund schemes whose management tenure is more than 5 years, where fund managers have given returns ranging between 5.8 per cent to 32 per cent roughly in their respective tenure of 5 years. However, in a contrary, among the 126 schemes whose management tenure is lower than 2.5 years, schemes have given returns ranging between 0.2 per cent to 23 per cent roughly in their respective period.

So, it is clear that management tenure can be a guide for the investment decision, but it can’t be the only parameter to invest in the fund.