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Do the Morningstar Fund Manager of the Year Awards Have Staying Power?

Our vice president of research takes a look.

John Rekenthaler, CFA, 01/16/2012

In 2011, the mutual fund managers recently decorated by Morningstar collectively went kerplop. True, the 2010 Fund Managers of the Year at Sequoia SEQUX were terrific. But Brent Lynn at Janus Overseas JAOSX and Michael Hasenstab at Templeton Global Bond TPINX got walloped, finishing near the bottom of their categories. And the Managers of the Decade, named in early 2010, followed up a good 2010 with a year to forget. In 2011, Bruce Berkowitz plunged and Bill Gross suffered his only bad outing in ... well, forever. (The third Manager of the Decade, David Herro of Oakmark International OAKIX, was about average.)

This predictably has led to jokes about the Morningstar Fund Manager of the Year award being a cousin of the (alleged) Sports Illustrated cover jinx. I'm not going to address that argument, partly because I would have made those same jokes if I were a journalist covering Morningstar, and mostly because there's nothing to address. The Fund Manager of the Year award has been around two decades now, and there has been no pattern of managers heading sharply south--or north--in the year following the award.

However, the comments did surface a weightier issue: How have Morningstar's Fund Managers of the Year fared? Those in charge of selecting Morningstar's Fund Managers of the Year (not me, although I do participate in a small way) will tell you emphatically that a Manager of the Year award is not predictive. It merely salutes past success. Alright, fine. Duly noted. But that's not how I look at the award--nor, I suspect, how you look at it. What's the point of identifying managers who demonstrated past excellence if they can't be excellent in the future, too?

So, in that spirit, as well as in the spirit of learning from history, here are the after-award results for the Manager of the Year winners. I examined the 10 years following the year for which the manager received the award, comparing a fund's Morningstar Risk-Adjusted Return, or MRAR (that is, the performance adjusted for the risk assumed by the fund--the backbone of the Morningstar Rating for funds, or star rating, calculation) against the average Morningstar Risk-Adjusted Return for that fund's category. If the manager received the award more than three years ago but less than 10 years ago, then I used the time period that was available. Managers who won for 2009, 2010, or 2011 are not evaluated because fewer than three years have elapsed.

I summarized the results for each fund according to the following scoring system. For domestic-stock and international-stock funds, beating the category MRAR average by at least 400 basis points per year gives Morningstar's award selectors a top score of 5. Beating it by 100 to 400 points earns a 4. Finishing within 100 basis points in either direction is a 3. Falling between 100 and 400 basis points below the average receives a 2. Finally, being more than 400 basis points behind the category average gets a score of 1.

I've also provided a comparison of the award managers' collective MRAR versus the category's collective MRAR for each of the three award groups (that is, Domestic Stock, International Stock, and Fixed Income). This is a bit unfair to the managers in that their funds lived to tell their tales, while the category averages are not adjusted for survivorship bias. But this is a ballpark study anyway; the idea is not to sweat blood coming up with the perfect measurement system but rather to get a fair and reasonably accurate picture.

A few ground rules. Some winning managers ran multiple funds. In those cases, I selected the bigger, more mainstream fund to evaluate. Next, many managers retired or moved before the decade expired. Unless they left very early in their tenures, I evaluated the funds as if the managers had stayed the whole time--a reasonable view given that typically they handed over their funds to handpicked proteges.

Finally, some funds required an editorial call. For example, Jeff Vinik left Fidelity Magellan FMAGX shortly after being selected as Morningstar's 1993 Fund Manager of the Year, and he became a highly successful hedge fund manager. Success? Flop? I decided neither and gave that pick a 3. Jim Callinan immediately hit the headwind of the tech-stock crisis after being named the 1999 Domestic-Stock Fund Manager of the Year for RS Emerging Growth, posted big losses on a new fund that he was assigned, and was quickly out the door. That's a 1 in my book.

John Rekenthaler is Vice President of Research for Morningstar.

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