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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.

The Case of Comanagers
Some funds with the longest-tenured managers fall somewhere in between the team-managed and solely managed camps, and you have to dig deeper to ferret out the long-tenured managers' impact on the funds' investment processes. Following are a few examples.

Franklin Income FKINX
Charles Johnson has the U.S. fund industry's longest tenure on any one mutual fund, at just more than 54 years. Johnson is also Franklin's chairman of the board. But comanager Ed Perks, who has been on board here since 2002, has really taken the lead on this portfolio. Perks has proved his mettle over time, and it seems safe to assume he'd remain at the helm when Johnson retires. Of greater concern, then, is this fund's aggressive income-oriented strategy which occasionally gives investors heartburn, as it did in 2008.

Franklin Growth FKGRX
Jerry Palmieri, manager at Franklin Growth since its 1965 inception, is still the lead manager at his fund, so his leaving would present more of a conundrum. However, in 2008, Franklin made clear its succession plans by naming Serena Perin Vinton as a comanager. (Her successful charge, Franklin Capital Growth, subsequently was merged into this offering.) So far, so good. Palmieri and Vinton seem to share a similar vision for the fund; they've worked together now for almost three years and stick with market-leading firms for the long haul. Over the past three years, the fund has produced a relatively strong result: Its 3% annualized gain lands in the large-growth category's best quartile. Although Palmieri's departure would be a loss for fundholders, investors still seem in good hands here for the long term. Moreover, Vinton's more than 10 years at Capital Growth produced results that beat more than three fourths of the fund's large-growth peers'.

Legg Mason Capital Management Value Trust LMVTX
Legg Mason Capital Management is almost synonymous with Bill Miller. He has run this fund since the early 1980s. While he's had comanagers at times, it's clear that this is mainly his record. He had an amazing run in the 1990s through 2005, when he was plying his highly concentrated, contrarian approach on his own. Overall since then, it's been tough going, and in mid-2010, Sam Peters was officially named Miller's eventual successor and was added to the fund in November that year. It looks like Peters is already making his mark on the fund. A recent portfolio looks markedly different from its historical profile. The fund has toned down its big stock bets so that they are closer to even weightings. The biggest weighting in the fund is AES AES with a modest 3.8% in assets. Peters say that's more of a function of where the market's current valuations are. We don't know if Peters can match Miller's long-term record, but it does seem that this could be a milder fund under his watch. However, it's still early into Peters' tenure to judge his strategy and his skill here.

Royce Pennsylvania Mutual Investment PENNX
Manager Chuck Royce has nearly 40 years on this Royce Funds' flagship. With one of the longest careers investing in small-cap stocks, Royce's expertise would surely be missed if he left, but he has spent the past decade or so building the firm's brain trust (and fund lineup). Today several Royce managers can boast impressive long-term records at other Royce funds--most of which also emphasize smaller companies--and comanager Jay Kaplan has worked with Royce on this offering for eight years, Lauren Romeo for five. Their involvement here should provide some continuity in terms of stock-picking and portfolio construction.

Conclusion
Responding to the eventual departure of long-tenured managers shouldn't be a knee-jerk reaction. A more-thoughtful decision-making process is called for, and there is time to get to know the new managers, watching for subtle (or dramatic) changes in portfolio construction or investment philosophy.

 

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