Fund Manager Changes: Should Your Fund Change Too?

A fund manager’s exit is often treated as a routine change, but it can quietly alter a fund’s DNA. Investment style, risk appetite and portfolio behaviour may shift without warning. For investors, tracking returns isn’t enough. The real risk lies in unnoticed style drift after a manager change. Let’s check the factors that reveal if the fund still fits its original mandate. [EasyDNNnews:PaidContentStart] 

Mutual Fund investing is often approached as a discipline of patience and consistency. Investors focus on long-term return potential, align funds with financial goals, and trust that chosen schemes will behave broadly in line with their stated mandates. Once a fund earns a place in the portfolio, it is typically monitored through periodic performance reviews rather than deeper structural scrutiny. However, active funds are not static products. They are shaped continuously by decisions taken inside the portfolio, many of which unfold gradually and without obvious triggers. 

Some of these shifts do not show up immediately in returns or volatility, especially when market conditions are supportive. As a result, meaningful changes in portfolio behaviour can go unnoticed for extended periods. This story examines one such underappreciated dynamic in active fund investing. It explores how internal changes influence portfolio outcomes over time, why favourable market phases can delay investor awareness, and how the impact becomes evident only when conditions turn less forgiving. It also outlines how investors can recognise these shifts early and respond thoughtfully rather than reactively. 

Why Fund Manager Changes Rarely Alarm Investors

Fund manager changes are not discreet events. Asset management Companies (AMC) disclose them clearly through  factsheets and regulatory filings. Yet most investors treat these updates as routine disclosures rather than meaningful developments. The primary reason is that performance rarely deteriorates immediately. Investors tend to respond to returns, not to structural shifts. As long as a fund continues to post acceptable numbers, there appears to be little cause for concern. There is also a widespread assumption that strong investment processes make individual fund managers largely interchangeable. 

While frameworks and oversight do exist, active fund management still relies heavily on judgement calls of fund managers that influence stock selection, sector positioning, portfolio concentration and overall risk posture. A change in leadership therefore introduces subtle but important differences, even if these are not immediately visible in performance. In the early months following a transition, portfolios often look largely unchanged. Holdings remain familiar, sector exposure stays within historical ranges and market capitalisation allocation does not show sharp deviations. This apparent stability reassures investors and reinforces the belief that the new manager is simply maintaining continuity. 

In many cases, this is intentional. Incoming managers usually avoid abrupt changes, preferring to observe and evaluate inherited positions before acting. Over time, however, portfolio behaviour begins to evolve. New additions reflect the incoming manager’s preferences, exit decisions follow a different assesSMEnt of risk and return, and cash levels or sector weights  are adjusted gradually. Each change may appear incremental, but taken together over six to nine months, they can materially reshape the fund’s investment character. 

What is Fund Manager Style Drift?

Fund manager style drift refers to a situation where a mutual fund gradually moves away from its stated investment approach following a change in leadership or strategy, without any formal change in its mandate. Over time, differences in stock selection philosophy, risk appetite and sector preferences begin to reflect in the portfolio. For instance, a Large-Cap fund that was earlier focused on established market leaders may start increasing exposure to mid-sized companies under a new manager seeking higher growth. 

Similarly, a value fund may begin adding momentum driven stocks during a rising market. Such shifts often go unnoticed because returns may remain strong in the short-term. However, style drift can alter the fund’s risk profile, increase volatility and disrupt an investor’s overall asset allocation. The impact usually becomes evident during market corrections, when the fund behaves differently from what investors originally expected, highlighting why tracking portfolio behaviour is as important as tracking performance. 

Style Drift: Unintended but Inevitable

Style drift does not usually occur because fund houses abandon mandates. It happens because investment philosophies differ. One manager may believe in owning market leaders with strong balance sheets. Another may prefer emerging companies with faster growth potential. One may prioritise valuation discipline. Another may be comfortable paying a premium for growth visibility. When leadership changes, these preferences express themselves through portfolio Construction. 

Over time, the fund begins to resemble a different style than the one investor originally selected. There is no formal announcement stating that the fund’s character has changed. The responsibility of interpretation rests entirely with investors, as there is rarely a clear explanation of whether the investment approach will remain unchanged after a manager transition. Factsheets provide data but do not highlight behavioural shifts. The scheme name remains the same. The category remains unchanged. Only the portfolio tells the real story. 

How Market Cycles Hide Risky Style Shifts

Market cycles play a crucial role in hiding style drift. During bull markets, aggressive positioning is often rewarded. Higher exposure to mid and Small-Cap stocks boosts returns. Sector concentration pays off. Stock specific bets look like skill. In such phases, funds that drift away in right direction from their mandates often outperform peers. As rankings improve, investor confidence strengthens, leading to higher inflows. There is little incentive for investors to question the source of outperformance. The problem is that bull markets do not last forever. When  liquidity tightens or valuations correct, the same aggressive positioning that boosted returns becomes a source of vulnerability. Funds that quietly increased risk tend to fall harder during market corrections. Volatility spikes, drawdowns deepen and the path to recovery becomes longer. Investors who believed they owned stable funds suddenly experience sharper losses than expected. This is usually when the realisation dawns that the fund is no longer behaving as it once did. 

How Investors Should Respond Without Overreacting

Style drift is particularly relevant when comparing value and growth funds, where discipline to a clearly defined philosophy matters as much as stock selection itself. At its core, a value fund is expected to protect capital during market downturn, while a growth fund is designed to maximise upside during expansionary phases. When a fund quietly moves away from these roles, investors are often caught off-guard during market corrections. 

While some investors overlook structural changes such as a fund manager transition and style drift, others overreact by stopping SIPs or redeeming holdings without fully understanding the consequences. Both approaches can be detrimental. So, how should an investor respond? The first step is observation. Track the portfolio over the next two to three quarters to assess how the new manager is shaping the holdings. Look for key indicators, as these will reveal whether volatility or overall portfolio behaviour is shifting. 

Below are some key factors to keep in mind when evaluating your fund’s performance: 

• Manager Tenure: The Foundation of Style Discipline
  Long manager tenure often signals stability in investment philosophy. In value funds, continuity helps preserve a valuation-driven approach even when markets reward growth aggressively. Funds such as ICICI Prudential Value Discovery Fund have historically benefited from consistent decision-making, resisting the urge to chase momentum-heavy stocks during growth-led rallies. The fund outperformed the category average in multiple years and has consistently featured in the top quartile in recent years. In contrast, frequent manager changes raise the risk of philosophical resets. 

A newly appointed manager in a value fund may feel pressure to improve near-term performance by introducing high-multiple growth names. Similarly, growth funds may dilute their mandate by rotating into deep value or cyclical stocks during periods of market stress. Over time, this blurs the fund’s identity and alters its risk profile. Aditya Birla Sun Life Value Fund has exhibited a growth investment style over the past few years, despite its primary focus on value oriented investments. The fund has underperformed both the category and the index over 10-year trailing returns. 

• Portfolio Turnover: The First Visible Signal
  Portfolio turnover is often the earliest quantitative sign of style drift. Value funds typically exhibit moderate turnover, driven by valuation convergence or deteriorating fundamentals. HDFC Capital Builder Value Fund, for instance, has historically shown measured churn aligned with its intrinsic value framework. A sudden spike in turnover following a manager change suggests aggressive reshaping. In growth funds, excessive churn, especially around quarterly earnings, can indicate a shift towards tactical trading rather than long-term compounding. 

While such activity may boost short-term returns, it often increases volatility and transaction costs, hurting risk-adjusted performance. A 95 per cent portfolio turnover ratio for Quant Value Fund as of March 31, 2025 means that almost the entire portfolio was churned once during the year. Such a turnover level suggests that the fund is not anchored to long holding periods typically associated with traditional value strategies. 

Instead, it reflects tactical allocation, frequent rebalancing, and higher conviction calls based on changing market conditions. While this approach can help capture short to medium-term valuation mismatches, it may also lead to higher transaction costs and greater variability in returns compared to low turnover value funds. In 2025, the fund remained in the bottom quartile and significantly underperformed the category average. 

• Market Capitalisation Drift: Risk Changes Quietly
  Market-cap drift is another subtle but powerful indicator. Value funds are expected to maintain a bias towards established companies where mispricing offers a margin of safety. During the 2020-21 broader market rally, several value-oriented funds expanded mid and small cap exposure to enhance returns. While this improved short-term performance, it also increased drawdowns when the cycle reversed. Aditya Birla Sun Life Value Fund has a notable concentration in mid and small-cap companies, leading to a higher downside capture ratio and a maximum drawdown that is deeper than both the category and index averages. 

Growth funds are not immune to this risk either. When a growth strategy increasingly shifts towards small and micro-cap stocks, it can materially alter the fund’s risk profile. While such exposure may enhance returns during bullish phases, it also makes the fund far more sensitive to market corrections. As a result, volatility can rise sharply, and drawdowns can be deeper than investors expect, often catching them off guard if they had assumed a relatively stable growth-oriented portfolio. 

• Sector and Stock Concentration: Conviction vs. Vulnerability
  Sector concentration often reflects a fund manager’s thematic preferences and conviction. In value funds, this can be a double-edged sword. Concentrated exposure to cyclical sectors such as metals, capital goods or energy can significantly enhance returns during favourable economic phases when valuations re-rate sharply. However, the same positioning increases vulnerability when the cycle turns, leading to prolonged underperformance if demand weakens or margins compress. 

Funds that maintained diversified sector exposure within a value framework have generally shown better resilience across cycles, while those heavily skewed towards a single cyclical theme have seen sharper drawdowns during downturns. Growth funds face a different but equally important challenge. High concentration in sectors such as technology, digital platforms or specialty chemicals, especially at peak valuations, can magnify downside risks when earnings expectations are reset. 

While growth investing often allows for higher sector and stock concentration due to strong earnings visibility and scalability, excessive dependence on a narrow set of themes can amplify volatility. Stock level concentration further compounds this risk, as any disappointment in a few large holdings can materially impact overall returns. Growth funds that balanced sector leadership with valuation discipline have managed corrections better, whereas those overly reliant on a handful of high momentum stocks have tended to underperform sharply during market corrections. 

• Where Style Drift Gets Exposed: Drawdowns, Benchmarks and Cycles
  A fund’s true character is often revealed not during market rallies, but during periods of stress. Downside capture ratios provide a powerful lens to assess whether a fund is behaving in line with its stated mandate. Value funds, by design, are expected to offer better downside protection due to their emphasis on valuation comfort and margin of safety. However, when a value fund begins capturing downside similar to aggressive growth funds, it raises a red flag. 

Such behaviour often signals style drift, either through increased exposure to mid and small-cap stocks, higher sector concentration, or a shift towards momentum-driven ideas. In these cases, investors are exposed to higher volatility without the compensating benefit of superior long-term returns. Growth funds present a different risk profile. They are expected to experience deeper drawdowns during corrections, particularly when leadership sectors correct sharply. What differentiates a disciplined growth fund is its ability to recover swiftly once markets stabilise. 

Funds that fail to bounce back meaningfully often indicate excessive risk-taking at peak valuations or a dilution of the core growth thesis. In several market phases, growth funds with concentrated bets and stretched valuations have struggled to regain lost ground, highlighting the cost of undisciplined positioning. Benchmark deviation offers another important clue into fund manager intent. Sustained divergence from benchmark characteristics usually reflects active risk-taking. While thoughtful deviation can generate alpha, frequent or opportunistic shifts tend to increase tracking error without delivering consistency. 

It becomes particularly relevant when deviations are not supported by a clear investment framework. Cash levels further enhance this analysis. Value funds typically raise cash when valuations appear stretched, preserving capital and preparing for better entry points. Growth funds, in contrast, usually remain largely invested to capture earnings momentum and compounding opportunities. Persistent misalignment, such as value funds staying fully invested in expensive markets or growth funds holding excessive cash during earnings-led upcycles, warrants closer scrutiny. These patterns often indicate reactive management rather than conviction-driven decisions. 

Ultimately, consistency across market cycles matters most. Value funds may underperform during growth-led bull markets, but they should protect capital during downturns and recover steadily as valuations normalise. Growth funds should lead during economic expansions and lag when markets rotate towards value. Funds that deliver erratic performance across cycles often reflect shifting strategies rather than disciplined investing. For investors, these signals collectively help distinguish between temporary underperformance and genuine style drift. Funds that stay true to their mandate, manage downside prudently, and exhibit predictable behaviour across cycles tend to justify long-term allocation, while those that oscillate between styles increase risk without improving outcomes. 

Final Take for Investors 

Fund manager changes are not inherently negative. Many transitions are well-planned and supported by strong institutional processes. The real risk lies in what investors fail to observe after the change. Style drift does not announce itself loudly. It unfolds quietly through portfolio decisions, risk positioning and behavioural shifts that only become visible when market conditions turn adverse based on style drift. For investors, the objective is not to react emotionally but to remain alert. A fund that no longer behaves the way it once did can still deliver acceptable returns for a while, especially in rising markets. 

The danger is that the portfolio may be taking risks that no longer match the role it was meant to play. When that mismatch surfaces during corrections, investors are often left surprised and disappointed. The solution is discipline, not constant action. Monitoring manager tenure, turnover levels, market capitalisation exposure, sector concentration and downside behaviour over a few quarters provides far more insight than tracking short-term returns alone. 

Asking simple questions helps. Does it still fit the role it was chosen for in the portfolio? Funds that remain consistent across market cycles may not always top the charts, but they earn investors' trust over time. Those that frequently blur style boundaries may appear exciting during bull phases but often disappoint when conditions change. In the long run, staying aligned with a fund’s mandate matters more than chasing temporary outperformance. For investors, awareness is the real edge. Watching how a fund behaves when no one is paying attention often tells you far more than how it performs when everyone is watching. This approach will help you stay informed, make corrective moves only when needed, and ensure your portfolio not only delivers returns but also safeguards your wealth. 

(Note: The fund comparison has been carried out using data sourced from MorninGSTar.) 

 

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