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5-Star Fund Manager Calls It Quits

Plus, prospective "Magic Formula" investors face higher investment minimums.

Morningstar Analysts, 04/05/2010

On March 19, Kevin O'Boyle, manager of the 5-star Presidio PRSDX, informed the fund's board of trustees he intended to resign as manager.

A week later, the board decided to liquidate the fund on April 29.

O'Boyle previously managed Meridian Value MVALX from 1995 until the end of 2003.

It is rare for a 5-star fund to dissolve. In 2009, out of the 1,170 U.S. equity funds that bit the dust, only 26 of those were 5-star funds. And since 2007, less than 2% of the more than 2,800 funds that closed were 5-star funds (compared with 17% for 1-star funds).

The fund has not gained much traction with investors even though it has generated impressive results since its May 2005 inception. It currently has about $60 million in assets, up only slightly from the $52 million it had at the end of 2007.

In an interview with Morningstar, O'Boyle said that it was his commitment to the fund, not asset size, that drove his decision to resign. "I lost the passion and commitment that is required to sustain the performance of a 5-star fund," he said. O'Boyle said his firm could sustain profitability and pay him a "comfortable mid-six-figure salary" as long as assets remained north of $50 million.

The lack of investor interest may be partially attributable to the fund's high fees. Its expense ratio is 1.50%, 25% higher than the 1.20% that the median no-load domestic small-cap fund charges. Morningstar has observed that assets have tended to flow into lower-cost funds in recent years.

Prospective 'Magic Formula' Investors Face Higher Minimums
On April 8, Joel Greenblatt's online money management firm, Formula Investing LLC, will raise its investment minimum for professionally managed accounts to $100,000 from $25,000.

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