Our standards are exceptionally high in these cases.
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
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
T. Rowe Price Latin America
T. Rowe Price Emerging Markets Stock
T. Rowe Price New Asia
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
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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