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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.

Matthews Pacific Tiger MAPTX
This fund retained its pick status after it shuffled its management team at the start of 2008. Mark Headley, who came on board as a comanager in 1996 and took the helm several years later, gave up his lead manager position at that time for health reasons. That was a blow, as Headley is one of the most seasoned and skilled Asia investors around. But he stayed involved with the fund as a comanager. Moreover, we had ample reason to believe in the two new lead managers, Richard Gao and Sharat Shroff. Gao is a veteran of the firm who had significant success running Matthews China MCHFX--and who served as a comanager on this fund for a couple of years--before assuming the helm here. Shroff was a comanager on two other offerings in Matthews' first-rate all-Asia lineup before taking over here. And we knew both skippers well from their tenures at this fund's siblings. The fact that they are supported by an exceptional pool of Asia specialists bolstered our confidence in them further.PAGEBREAK

T. Rowe Price Latin America PRLAX
We removed this fund from our picks list after T. Rowe Price announced that lead manager Gonzalo Pangaro was being replaced by Jose Costa Buck in December 2008. Pangaro did a good job as a comanager as well as a lead manager on this fund, so his upcoming departure was unwelcome news, but there were some positive aspects about this transition. Pangaro was leaving to take over as lead manager of T. Rowe Price Emerging Markets Stock PRMSX and would remain on the committee that oversees this fund, so he would continue to have influence here. Buck was a Latin America analyst and worked closely with the prior managers of this fund for eight years before taking the helm, and he had considerable experience in the region before joining T. Rowe Price in 2000. Buck would be supported by one of the biggest and best emerging-markets teams around. However, all that wasn't enough to make up for the fact that Buck had no prior portfolio-management experience.

T. Rowe Price Emerging Markets Stock PRMSX
We elected to keep this fund on our picks list after T. Rowe Price disclosed that Gonzalo Pangaro would be replacing Chris Alderson as lead manager March 31, 2009. Our decision was based on four considerations. First and foremost, Pangaro was exceptionally qualified for the job and we were quite familiar with him. He was a longtime member of the firm's global emerging-markets team who handled the Latin America stock selection for this fund. He was the successful skipper of T. Rowe Price Latin America, and we got to know him well in that role. Second, T. Rowe Price expanded Pangaro's responsibilities and regional expertise well before the change by making him co-head of its global emerging-markets team and comanager of this fund in September 2008. Third, Alderson, whom we have a lot of confidence in and who was leaving to become president of T. Rowe Price International, would remain part of the committee that oversees this fund. And fourth, Pangaro would be supported by a very deep and skilled team with considerable proficiency across the developing world.

T. Rowe Price New Asia PRASX
T. Rowe Price recently announced that Frances Dydasco, who joined this fund as a comanager in 1996 and became its lead manager in 2006, would be retiring in August of this year and that Anh Lu would take charge of the portfolio at that time. Dydasco will be missed, because she has proved herself to be a knowledgeable and skilled Asia investor during her long tenure, but there are some grounds to be optimistic about the upcoming change.

Lu, who was just named a comanager on this fund, does have a good resume. She spent a few years as an analyst covering Thailand, the Philippines, and Indonesia, had short stints running a Thai portfolio and the southeast Asia portion of an Asia ex-Japan portfolio, and worked as an investment banker in the region before she joined T. Rowe Price in 2001. And during her tenure at T. Rowe Price, she has worked as the firm's Asia technology analyst, picked emerging-Asia small-cap stocks as a comanager on T. Rowe Price International Discovery PRIDX, and worked closely with Dydasco on this fund. But Lu's portfolio-management experiences have been fairly short in duration and pretty narrow in focus, and she has no public record of her own running money. Thus, we don't have enough confidence in her as a portfolio manager at this point in time for this fund to be a Fund Analyst Pick, and we've dropped it from our list.

Conclusion
As these cases make clear, we tend to remove funds from our picks list when they change managers unless the new skipper has a relevant, extensive, and proven record of success running money and we have a lot of confidence in him or her. That said, it's important to remember that the management and other standards for our Fund Analyst Picks are very high and that the funds we remove from the list may well still be solid or even good offerings. Indeed, we were cautiously optimistic about Oppenheimer Developing Markets when Leverenz took over (and he has produced strong relative results over his first two years). And we think that T. Rowe Price Latin America remains one of the better choices in its category now that it's run by Buck, and we believe that T. Rowe Price New Asia will still be one of the better options in its group after Lu takes over. 

William Samuel Rocco is a fund analyst with Morningstar.

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