In practice, there is one overwhelming reason why investors dump their mutual funds: poor performance. Once their funds fail to live up to expectations or experience a short-term slump, most folks are quick to bail out and look for better-performing prospects.

But in theory, the most important catalyst for selling a mutual fund is a change in management. Short-term underperformance won't last forever, and all funds will lag from time to time, but when the manager of a fund leaves, that should prompt investors to re-examine their reasons for holding the fund.

Out with the old ...
The truth is that a mutual fund is only as good as its manager or management team. So if you've got a superstar manager who has racked up a fabulous track record and he or she subsequently leaves the fund, that record is no longer a good indication of what the fund will be tomorrow and the day after that.

Now, there are some exceptions to this quandary. If your fund is run by a management team, the departure of any one person is unlikely to meaningfully affect operations. So, for example, you could probably hold a fund from a shop like Dodge & Cox and never really have to worry about having to sell your fund if any team member leaves or retires.

Likewise, if the new incoming manager has a track record managing money at another fund or has been working on the current fund in some capacity, for example, as an analyst, you might feel comfortable enough to hang on. But you should see some proof of the manager's success investing with a mandate similar to your current fund to consider staying put. That means you've got to evaluate each manager change on a case-by-case basis to see if it makes sense to stay.

Let's look at two funds that have had recent management changes to see why investors may or may not feel comfortable continuing to invest:

T. Rowe Price New Horizons (PRNHX)
This fund definitely suffered a loss in March 2010 when its manager of nearly 23 years stepped down. Taking his place was manager Henry Ellenbogen, who had run T. Rowe Price Media & Telecommunications (PRMTX) from April 2005 through October 2009. In that time, he guided the fund to a 10% average annualized gain, compared with a 0.2% loss for the average communications mutual fund and a 0.8% loss for the S&P 500. So clearly, Ellenbogen is a skilled manager, judging from this track record.

However, Ellenbogen's mandate at New Horizons is quite a bit wider than at the specialty fund he used to run. Whereas Ellenbogen invested in large-cap tech market leaders such as (Nasdaq: AMZN) and Google (Nasdaq: GOOG) at his former charge, New Horizons is a small-cap growth fund and requires a different focus.

Of course, so far, Ellenbogen has done well. Since he took over the fund last March, New Horizons has posted an annualized 42.5% gain, versus 37.7% for the Russell 2000 Growth Index. Now Ellenbogen looks for small-fry companies that have unique products or services in the marketplace that allow them to protect  market share, drive returns, and grow into larger holdings at the fund. Current top fund holding Henry Schein (Nasdaq: HSIC), a medical equipment supplier, is a prime example of this type of company.

Right now, it's a bit too soon to be able to fully judge Ellenbogen's performance at New Horizons. However, I think he has what it takes to be a first-rate manager here, and ultimately, I believe he will do a fine job at his new post. Investors might want to give it a bit more time to see how performance plays out here in differing environments, but in the end, I don't think this manager change should have a negative effect on the fund's long-term prospects.

Harbor International (HIINX)
Another fine fund that has had to deal with loss in recent months is Harbor International. Manager Hakan Castegren, who headed up this fund since its late 1987 inception, passed away in October 2010.

Castegren had built up a tremendous track record during his tenure, beating 97% of all foreign large blend funds in the past decade and a half. While developed market stocks are the main attraction here, emerging markets account for roughly 17% of assets and include market leaders that management believes will thrive in the current challenging global market environment such as Petroleo Brasileiro (NYSE: PBR) and China Mobile (NYSE: CHL).

With Castegren's passing, the management baton has been handed to a team of four co-managers who were named to the management position in early 2009. However, these folks have worked with Castegren as analysts for years, so they have a solid understanding of how the fund operates. This succession plan has been in place for a while, with the team utilizing a consensus approach to making buy and sell decisions to ease the transition down the road.

Again, it's too soon to tell how the team will perform on its own, but given the lengthy transition plan and management's extensive experience with the fund, odds are good that the team will be able to keep producing solid results for fundholders. Keep one eye open here, but don't feel the need to run away from Harbor International.

If you see a change in management going on at one of your mutual funds, don't ignore it. Dig in and take a closer look at who is now running your fund, what his or her background is, and how that experience translates to the fund's current investment approach. If you aren't comfortable with what you find, don't be afraid to look elsewhere -- there are other options out there.

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