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Fund Manager Changes Deserving of a Deeper Look

Have these three funds taken one step forward and two steps back?

Greg Carlson, 05/07/2010

We follow significant manager changes at Morningstar, and it's instructive to check in on some of those funds down the line and see what kind of impact the new skippers have on their charges. Here are three funds for which those changes raise some concerns.

Fidelity Growth & Income FGRIX
This fund's shareholders have been through the wringer. Longtime skipper Steve Kaye, who employed a conservative style that shone in the 2000-02 bear market, was pushed out in late 2005 after sharply lagging his large-blend peers in the rally that followed. The much-more-adventurous Tim Cohen took over and bought economically sensitive fare only to see it tank. He was given the heave-ho in early 2009, just before the recent rally started, in favor of James Catudal.

Catudal's strategy is nothing like Cohen's; he keeps the fund's sector weightings close to those of the S&P 500 Index and attempts to outperform through modest bets on individual firms. His former charge, Fidelity Stock Selector FDSSX, essentially tracked the index during his eight-year tenure, and it wouldn't be surprising to see the same thing happen here. (The fund has now lagged the category norm each calendar year since 2002.) It's as if this fund's approach went from too cool, to too hot, to too dull.

Vanguard U.S. Value VUVLX
After its June 2000 launch, this fund got off to a great start under subadvisor Grantham, Mayo & Van Otterloo. But in 2006 and early 2007, GMO's time-tested quantitative approach stumbled, and Vanguard added AXA Rosenberg, another quant manager, to the fund. GMO was subsequently shown the door in early 2008, and Vanguard's quant group took over one third of the fund. From late February 2008, when GMO departed, the fund slightly lagged its typical peer in the brutal downturn that ended March 9, 2009, and has since lagged the group norm by 2 percentage points. (All told, the fund lands in the category's bottom third since GMO left.) The rally was led by speculative fare, which is not this fund's focus, but it should've held up better in the downturn.

One possible reason for that poor performance, and an event that could lead to more changes at this fund: AXA Rosenberg recently revealed that a coding error that affected information flow between the firm's risk model and its portfolio-optimization process was discovered in June 2009, but wasn't corrected until between September and mid-November. The fallout has been substantial already: Firm founder and chairman Barr Rosenberg has taken a 30-day leave and research director Thomas Mead will resign within a year. And on April 30, 2010, the board of Charles Schwab's Laudus Rosenberg funds (which the firm subadvises) said it was immediately closing the four funds to new investors and would liquidate them July 30. Meanwhile, Vanguard said it is evaluating the situation at Barr Rosenberg, which subadvises not only U.S. Value, but also Vanguard Market Neutral VMNFX and a portion of Vanguard Explorer VEXPX.PAGEBREAK

Fidelity Blue Chip Growth FBGRX
Sonu Kalra took over this large-growth fund in July 2009 from Jennifer Uhrig, who posted middling returns during her three-year tenure. (Blame that on a benchmark-hugging strategy.) The fund has certainly perked up under Kalra: It's beaten the category norm by 12 percentage points, as the rally that began in March 2009 has rolled on. Kalra came to this fund from Fidelity OTC FOCPX; he put up a solid record there, but his universe was far racier.

To be fair, Kalra hasn't loaded up on junky companies here; some of the fund's big winners include solid growth plays such as Apple AAPL and Google GOOG. And this fund may very well turn in solid performance over the long haul. But the ride could be awfully bumpy: On four measures of quality (lower debt/capital ratio, higher net margins, higher returns on assets, and higher return on equity), the fund's holdings rank distinctly below the category norm. Given those characteristics, the fund could disappoint if the economy slides downward again--a time when a fund with "blue chip" in the name would be expected to shine.

A version of this article previously ran in Morningstar FundInvestor.

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