Funds that are slumping after a manager change.
This article originally appeared in Morningstar FundInvestor, an award-winning newsletter that presents investment strategies and tracks 500 funds.
Red Flags is designed to alert you to funds' hidden risks. Such risks can take many forms, including asset bloat, the departure of a solid manager, or a focus on an overhyped asset class. Not every fund featured is a sell, and in fact some are good long-term holdings. But investors should be prepared for a potentially bumpier ride in the near future.
A fund having a tough stretch does not necessarily turn us off. That's because a fund's past performance does not predict its future returns. In addition, a fund's style can be out of favor for years at a time, and even our favorite managers go through slumps. It stands to reason, however, that the results of management's work ought to show up in a fund's returns. Funds that have landed in a category's bottom quartile over the first three to five years of a new manager's arrival bear revisiting. With that in mind, let's take a closer look at several funds that have lagged the competition under current management.
Vanguard U.S. Growth
Alan Levi and a team from AllianceBernstein manage one sleeve of this subadvised fund, and John Jostrand and a team from William Blair oversee the other. Despite a strong 2005, the fund's 6% and 9% annualized gains over the trailing three- and five-year periods through March 2008, respectively, land in the large-growth category's basement. A big slug of hard-hit financials holdings such as JPMorgan Chase
American Century Ultra
Tom Telford stepped into the manager role here in 2006 after a lackluster stint at American Century New Opportunities II
This fund's 11% annualized gain over the trailing five years through March 2008 is certainly not terrible in absolute terms, but it falls behind 85% of its midcap blend category peers. Skipper John Rogers took the helm here in October 2002 and was joined by comanager Matthew Sauer in late 2006. The duo eschews cyclical companies, so the fund has not benefited from the energy and industrial materials rallies that stole the show during most of their tenure. Rogers and Sauer want stocks trading at deep discounts and are apt to add to holdings such as mailing services provider Pitney Bowes
Jason Yee took this fund over after meeting with some success at his smaller charge Janus Global Opportunities
Andrew Gogerty is a mutual-fund analyst with Morningstar.