(By Adam Zoll) Change can often be a good thing. Without it, New Year's resolutions would be pointless, and the self-help book industry would be out of business. When it comes to mutual funds, changes in management bear close watching. Your fund's new manager or management team may take a different approach from that of its predecessors, with results that can be positive or negative.
As investors, it can be frustrating--not to mention costly--to see a fund we've long cherished begin to underperform once new management takes over. Of course, underperformance can't always be chalked up to a new manager. It could be that the new manager had the misfortune of taking the helm just as market conditions were shifting against the fund's approach, or perhaps the new manager was brought in to reverse a slide that was already well under way. Deservedly or not, a new manager whose start date roughly coincides with a fund's change in fortune is likely to bear at least some of the blame in the eyes of investors. Determining whether it is the fund manager who is to blame or other forces, and in turn whether a manager change is reason to sell, requires diligence on the part of shareholders. This means examining fund documents for changes in approach, watching for allocation shifts in the fund's portfolio, and of course reading Morningstar Analyst Reports for information about the fund.
To find once-strong funds whose recent management changes coincide with recent underperformance, we turned to Morningstar's Premium Fund Screener tool. We searched for equity funds that have changed managers within the past three years and that have bottom-quartile three-year returns, but 10-year annualized returns equal or better to their category averages, to identify those that were more successful previously. To avoid funds that may have only changed managers in recent months, and therefore have new skippers who bear little blame for recent performance, we included only funds whose new managers have been on the job for at least a year. We also applied the distinct portfolio screen to eliminate multiple share classes of the same fund.
The resulting list doesn't provide a perfect cause-and-effect result. For example, a manager might only own the most recent year of a fund's poor three-year record. There are exceptions, as well. One of the funds on the list, Janus Contrarian (JCNAX), experienced a management change in July 2011 and followed up a 99th percentile performance that year with a 2nd percentile performance in 2012. But if nothing else the screen calls attention to several funds that have performed poorly during the past three years, with management changes that could help explain why. Premium Members can click here to see the full screen.
Columbia Marsico 21st Century (NMTAX)
Category: Large Growth | 3-Year Percentile Rank: 97
First-time fund manager Brandon Geisler took over the fund in October 2011 following the departure of predecessor Cory Gilchrist, whose oversized bets on financials and consumer cyclical stocks in late 2008 caused it to trail its peers. The fund has since dialed back its allocation to financials, a sector that rebounded strongly last year. The fund's high-conviction approach focuses on rapidly growing companies, steady growers, and promising firms suffering short-term setbacks. The portfolio is relatively concentrated at about 50 names.
AllianceBernstein International Growth (AWPAX)
Category: Foreign Large Growth | 3-Year Percentile Rank: 89
Like its parent, this fund has experienced significant changes in recent years. In early 2011, the fund's management structure was reduced from six or seven sector heads to four, two of whom were new to the firm or the role. Then the fund laid off about one third of its analyst staff in early 2012. The fund looks for industry leaders with experienced management teams and long-term earnings-growth potential. Its new management team has steered the portfolio to a somewhat higher level of concentration, with fewer than 100 names, while reducing exposure to the telecom sector. The fund lost 16.5% in 2011--a tough year for foreign stocks--and followed that up with a gain of 15.4% in 2012. Both results were in the bottom quartile for the category and trailed the fund's benchmark by more than 4 points and by more than 2 points, respectively.
Performance data as of Jan. 7; portfolio information for Columbia Marsico 21st Century and AllianceBernstein International Growth as of Nov. 30.