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The Downside of Conviction

There is a difference between appreciating that some investments require patience and praising the fault of intransigence.

John Rekenthaler, 12/23/2016

Absolute Certainty
Last week, FPA announced that veteran portfolio manager Bob Rodriguez was retiring, effective Dec. 31. As FPA noted in its press release, Rodriguez ("Bob Rod" in Morningstar's fund-analyst slang) is the only fund manager to have collected Morningstar Manager of the Year accolades for both stock and bond funds. Indeed, he won three such honors for FPA New Income FPNIX in 1994, 2001, and 2008.

(I wrote the commentary that accompanied 1994's award, but as that year predated the birth of morningstar.com, there is no link. For a suitable fee, however, I could recreate the era. I could find that binder in Morningstar's library, photocopy the relevant pages, and send them via fax. We could brand that experience: The Early Nineties Technology Ride.™)

The first two awards presaged seven years of good fortune, but the third was no charm. Positioned to protect against the next bond bear market, FPA New Income sharply trailed the Barclays Capital U.S. Bond Aggregate in 2009, and in 2010, and in 2011, and in 2012. It recovered to outperform in 2013, then went back to lagging. Cumulatively, it has dropped 16 percentage points to the index since its 2008 triumph.

Nobody can accuse Rodriguez of lacking conviction. Quite the contrary; he is the industry's most vocal, impassioned bond fund manager. DoubleLine's Jeff Gundlach attracts more headlines, but he leaves open the possibility of altering his tactics should the markets change. Rodriguez, in contrast, beats the same drum: The U.S. financial system is broken; bond investors live on "borrowed time"; Federal Reserve officials are "glorified snake-oil salesmen."

That's Entertainment
Such passion is good for business. Table pounders are quotable. Journalists like them, fund analysts like them, financial advisors like them, and investors tend to like them. They also make for excellent speakers. Rodriguez drew a standing ovation with his thunderous condemnation of all finances American at the 2009 Morningstar Investment Conference. The audience loved it. If, however, they had acted on those comments, they would so far be poorer for their efforts.

This is not to disparage conviction. If this column did that, it would deconstruct itself, as it would be insisting about the error of insisting. We all know the story of The Big Short--insightful investors who foresee what looms, and who must have the courage of their beliefs to withstand steep market losses before enjoying even steeper market gains. That large tale is retold in small, year after year, throughout the financial markets. Often, being right means willing to endure long stretches of being wrong.

However, there is a difference between appreciating that some investments require patience, and praising the fault of intransigence. This is not to say that Rodriguez, specifically, has been stubborn. Perhaps he has not updated his views because he is correct. Rather, the point is that, as a general rule, refusing to change is no better than changing. One man's constancy is another's rigidity. One woman's inconstancy is another's adaptability.

Changing for the Better
And there are plenty of cases where abandoning conviction has served investors well. In their glory days of the '70s and '80s, when they routinely beat the S&P 500, Fidelity's diversified stock funds were famously (or notoriously, depending upon your view) flexible. Their managers would buy the securities that they liked, regardless of what the funds' names and prospectuses might imply. That spirit lives on today with giant Fidelity Contrafund FCNTX, which, despite its title, holds so many popular stocks that Morningstar categorizes it as a large-growth fund.

is vice president of research for Morningstar.

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