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Should Fundholders Fret When Tenured Managers Leave?

When experience walks out the door, whether or not to sell depends on the circumstances.

Bridget B. Hughes, CFA, 05/23/2011

In the sometimes topsy-turvy ranks of mutual fund management, it can be tough for investors to find good funds with long-tenured managers. In fact, the average mutual fund manager stays just less than seven years on a fund. Why? A successful manager may leave to start his own firm or jump ship to a competitor. Or a fund without much in assets may merge into another fund. Or a rising star may be promoted to a larger fund at the same shop, and so on.

However, a small percentage of fund managers have stuck with one (or more) funds for the long haul. In fact, 59 funds (excluding share classes and only considering funds that still exist today) boast portfolio managers with tenures of at least 25 years.

Of course, the downside is that with really long tenure, the manager could well be near retirement. But even so, there are good reasons to invest with managers who have worked through a few market cycles. Below are some general tips, as well as some ideas about specific funds with long-tenured managers.

Well-Functioning Teams Mitigate Brain Drain
A long-tenured manager retiring is less of a worry when funds are run by big teams with individuals of varying levels of portfolio-management experience. Among those with at least one manager with at least 25 years of experience but numerous additional managers to pick up the slack are a slew of American Funds offerings including giants American Funds Income Fund of America AMECX, American Funds EuroPacific Growth AEPGX, and American Funds Growth Fund of America AGTHX. Dodge & Cox Balanced DODBX and Dodge & Cox Stock DODGX, as well as Dreyfus Appreciation DGAGX, Vanguard Windsor II VWNFX, and Vanguard PRIMECAP VPMCX, also fit the bill.

These team efforts from a big group help mitigate the negative impact that can come should an experienced skipper walk out the door, particularly when cultivating and compensating talent is part of the firm's culture. For example, American Funds portfolio manager Mike Shanahan, who had been onboard American Funds AMCAP AMCPX since 1986, recently retired. But five other managers, two of whom have 15 years on the fund, remain. (American Funds' managers, plus the research analyst group, each run a sleeve of the portfolio independently of the others.)

Big Shoes Can Be Hard, but Not Impossible, to Fill
Long-tenured managers are often part of a team, but nine of the longest-tenured managers are on their own at a fund's helm. In these cases, it's important to figure out whether the fund is a cult of personality, a process-driven one that might more easily transfer to a successor, or offered by an organization that has shown success in cultivating talented portfolio managers.

For funds like CGM Mutual LOMMX and Natixis Advisor CGM Targeted Equity NEFGX, both of which Ken Heebner has run for more than 30 years, it's tough to imagine Heebner's highly flexible, highly concentrated, and fast-turnover approach easily transferring to another party in quite the same way. Even with an experienced manager at the helm, the fund's performance has been unpredictable and volatile (though strong over the very long haul); without Heebner, the uncertainty seems only to escalate.

In other cases of sole portfolio managers, however, the future looks more promising in the event of the manager's departure. Take Analyst Pick T. Rowe Price Equity Income PRFDX, for example. Here Brian Rogers, also the firm's chairman of the board and chief investment officer, has done a spectacular job over the long term; the fund's 7.6% annualized 15-year gain lands in the large-value category's best quartile. While losing him would be a negative, it wouldn't likely be a deal-breaker. T. Rowe Price historically has announced successions ahead of time and allowed for a transition period. Plus, several of the firm's highly regarded analysts have successfully moved into the portfolio-management ranks on other T. Rowe Price funds. In addition, T. Rowe manager changes generally do not lead to strategy shifts, and that seems likely to be the case at this fund given its cautious dividend-centric mandate.

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