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Assessing Manager Changes at Our Fund Analyst Picks

Our standards are exceptionally high in these cases.

William Samuel Rocco, 05/19/2009

We set the bar high for our Fund Analyst Picks, and we insist that they have much more going for them than superior long-term performance prospects. The four main nonperformance factors that we demand are: good stewardship, low expenses, consistent and thoughtful strategies, and experienced and successful management.

Of course, once a fund becomes a Fund Analyst Pick, we keep close tabs on it in order to make sure that it continues to meet our standards. We tend to be somewhat forgiving about a shorter-term slump--which are painful facts of life for all funds and are often driven by a strategy being out of favor--and typically don't react until there's evidence that one of our picks has lost its long-term performance advantage over its category peers.

We're normally not very patient when one of our Fund Analyst Picks worsens significantly on one of the four nonperformance factors, though, because this sort of deterioration calls into question the fundamental attractiveness of a pick and undermines its long-term strength.

However, on three of the four nonperformance factors, it hasn't been very common thus far for our Fund Analyst Picks to go downhill in a meaningful way. Funds and shops that have proved their commitment to good stewardship rarely ease up on their dedication to treating fundholders well. Of course, the universe of superior funds isn't exempt from cost increases, and many funds from across the quality spectrum have seen their expense ratios rise of late because of declines in their asset bases. But our picks tend to be cheap to begin with--and tend to either avoid expense hikes or keep them to a minimum--so we haven't had to drop very many funds from our picks list because of costs increases. And while some topnotch funds do make adjustments to their strategies over time, such funds usually make small and sensible modifications, and they rarely make sizable and counterproductive alterations.

It's another story with respect to the fourth nonperformance factor: experienced and successful management. This is essential for funds to be topnotch long-term offerings; there is a wide variety of market conditions that their skippers will face over time and a complex set of skills needed to do the job well. Manager changes occur with some frequency even among high-quality funds from first-rate shops, be they due to individuals moving on to other positions within or outside the firm, skippers retiring, or other developments.

Therefore, we've had to reevaluate a number of Fund Analysts Picks over the years on account of manager changes. In some cases we've determined that the new manager has what it takes to be in charge of a pick, and we've kept the fund on our picks list. But in other instances we've decided that the new skipper isn't up to snuff--even though he or she may have a pretty good resume--and we've removed the fund from our picks list. And to give you a better sense of what distinguishes the first type of case from the second, we thought that it would be worthwhile to review a handful of manager changes that have occurred at funds that were picks at the time of the switch.

Oppenheimer Developing Markets ODMAX
This fund remained a Fund Analyst Pick after Rajeev Bhaman, who had run the portfolio quite successfully for eight years, left in December 2004 to take over Oppenheimer Global OPPAX. Oppenheimer made it clear in advance that Bhaman was going to leave and brought in his replacement, Mark Madden, as a comanager in August 2004. That way, Madden could run this fund together with Bhaman for a few months and become expert on its strategy and holdings before taking charge. Meanwhile, Madden had produced strong overall results running Pioneer Emerging Markets PEMFX from mid-1994 to mid-2004. The strategy he used there is similar to the one employed here, and we became familiar with him and confident about his abilities during his time at Pioneer.

But we dropped this fund from our pick list after Madden departed in the spring of 2007 to take a position outside of Oppenheimer. His replacement, Justin Leverenz, did bring some good credentials to the job. Leverenz had extensive emerging-Asia and tech-investment experience before he joined Oppenheimer, and he expanded his geographic and sector knowledge while spending a few years as a senior analyst on Oppenheimer Global. However, the only portfolio-management experience he had before taking over this fund was running offshore Taiwan and China offerings for a couple of years in the mid-1990s.

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