An investor sifts through reports on mutual-fund performance in search of gems – funds run by star managers who have beaten their peers year after year. A check is mailed, the investor sits back to watch the profits roll in for 10, 15 or 20 years, perhaps much longer.

After all, the whole idea of investing in a mutual fund is to leave the hard work to a pro, to let the bet ride for the long term.

But often things don’t go as expected. The manager quits, dies, gets promoted, transferred or fired. Since so much of the decision to buy the fund in the first place was based on the manager’s record, this is a nasty and unexpected curve. What’s the investor to do?

Any investor is likely to face this unsettling situation from time to time. At the end of last year, Jim Craig stepped down as manager of the highly successful Janus Fund to focus on his role as chief investment officer for the entire Janus family. Then he announced a few weeks ago that he was leaving that post as well to head a charitable foundation, causing worries for investors in all the family’s funds.

Investors could well have counted on the 44-year-old manager sticking around for decades to repeat the market-beating performance he’d produced at Janus. A $10,000 investment when Craig took over the fund in mid-1986 grew to $106,000 when he stepped down at the start of this year, beating a similar investment in a benchmark Standard & Poor’s 500 index fund by $22,000.

Still, investors who stuck with the Janus fund this year have little to complain about. Under the new manager, Blaine P. Rollins, it returned about 10% through the end of August, trouncing the other funds in the “Large Growth” category, which returned only 0.5%.

But not all investors fare as well when managers leave. In 1996, manager Garrett Van Wagoner left the high-flying Govett Smaller Companies Fund to start his own funds. The Govett fund then produced three years of double-digit losses, among the worst in its category, while Van Wagoner’s new funds clobbered their competitors.

Which is typical – the Janus or the Govett case? In fact, there is no hard and fast rule about what will happen in the aftermath of a manager’s departure. Indeed, some academics believe managers’ contributions to fund performance is overrated in the first place.

 “The typical academic view is that, when it comes to the value the manager adds, if there’s anything, it’s small,” says David Musto, a Wharton finance professor who studies funds. While fund companies tout superstar managers to attract new investors, performance data going back only a few months or years is not a statistically valid gauge of a manager’s talents, he adds. “By the time you have enough evidence on a manager, enough of a track record to be of statistical significance, the guy is 50 years old.”

Many managers who appear to be guiding their funds to market-beating returns are just lucky; they are invested in the market sector that just happens to be doing well at the time, Musto argues. Thus the manager who looked like a wizard when he picked Internet stocks last year looks like a flop today.

Musto and many others argue that investors should be less concerned about who manages a fund than about the fees the fund charges shareholders. Over long periods, funds that charge the lowest fees tend to have the best returns, because the money saved on fees stays in the fund and has a dramatic effect as it compounds.

In hopes of finding a clearer pattern to the aftermath of manager departures, fund-tracking company Morningstar recently compared funds that had changed managers between 1990 and 1995 with funds that had kept their managers. In the following five years, ending in June 2000, the top-performing funds from the earlier period tended to continue beating their peers – even when managers had left.

Looking at funds that had done poorly in the first half of the 1990s, Morningstar found that they tended to continue doing poorly – again, regardless of whether there had been a change in managers. “These findings have important implications for investors,” Morningstar said in its report. “For one, they suggest that when a manager change occurs at a strong-performing fund, it may well be worth sticking around…For investors in rotten funds, however, a manager change may not be cause for celebration. Indeed, because so many poor performers continue to trail the pack, even after a new manager comes aboard, they may be strong sell candidates.”

Of course, the conclusions of a broad survey are of limited value to an investor with an individual fund that is changing managers, since there are many exceptions to the overall findings. Investors in poor-performing funds might have little to lose in getting out, regardless of whether the manager stays or goes, since better returns can probably be earned elsewhere. But investors sitting atop big gains earned over the years in winning funds should not jump ship too casually, as selling profitable fund shares triggers capital gains tax bills (assuming the fund is not held in a tax-deferred account such as an IRA or 401(k).

How, then, should the sell-or-hold decision be made if a fund changes managers after a good run? Russ Kinnel, Morningstar’s director of fund analysis, says investors should try to determine the extent to which past performance was really due to the departing manager’s investment-picking prowess. In fact, many funds use a management team, even if one person gets top billing. If the bench is deep enough, it may not matter that the star is leaving. Even if the departing manager was largely responsible for the fund’s success, he or she may have established an investment-picking system that successors can follow successfully.

Investors should also compare the fund’s performance to that of its category. If the entire category has been rising at a similar pace, the fund’s success may be due to favorable market conditions rather than exceptional management. In this case, investors are betting not on the manager but the market, and the sell-hold decision should depend on their market forecast.

Another key issue, Kinnel says, is the track record of the new manager. Obviously, investors should feel better if the replacement has a strong long-term record, and they should be wary if he or she is a newcomer.

Morningstar senior analyst Scott Colley says it’s also important to determine whether the new manager will change the fund’s investment style. Even a style change for the better can have a downside. If the manager sells holdings that have racked up big gains in the past, the profits must be distributed to shareholders by the end of the year. While most fund shareholders reinvest these legally mandated distributions, and may not even realize they are getting them, this money nonetheless triggers a capital gains tax bill for the year it is paid. Generally, it’s best to avoid funds that make big annual distributions, since tax payments consume money that otherwise could be growing in an investment.

For investors, manager changes are a fact of life. Some fund families, like industry giant Fidelity, make it a practice to promote successful managers to ever-bigger funds and to quickly get rid of poor performers, says Kinnel. Changes, then, aren’t necessarily a sign of past trouble or a red flag for the future.

Investors who find the prospect of management changes disconcerting do have an alternative – index funds. Instead of hunting for hot stocks, these “passively managed” funds merely buy the stocks in a benchmark index, such as the Standard & Poor’s 500. Index-fund investors thus don’t have to worry that the manager will leave. They don’t have to face the tax bills that come after they bail out of funds that have produced big profits under the previous management. Moreover, annual, tax-generating distributions tend to be very low with index funds because they rarely sell their profitable holdings.

Best of all, index funds have beaten most actively managed funds through the last decade, mainly because shareholders aren’t charged fees to support managers and their teams.