Will These Former Highfliers Be Reborn?

Recently, we had visits from two managers who aren't household names but run funds that are. Sam Peters, who just became lead manager of Legg Mason Capital Management Value LMVTX (the fund formerly known as Legg Mason Value), stopped by Morningstar's Chicago office as did Jeff Feingold, who recently took over Fidelity Magellan FMAGX.

Both funds were famous for amazing returns then infamous for dismal returns when their great runs ended. Legg Mason Capital Management Value's rise and fall came under the same manager, Bill Miller, while Magellan's rise was under Peter Lynch and its gradual downfall came under a number of successors.

Evaluating the funds represent a challenge for investors, today, though. With new managers, you really have to forget about the past for these funds. Whether they made you money during their glory days or burned you in their slumps, you need to look past what happened and come at it fresh.

Of course, you aren't required to research these particular two funds out of the thousands out there, but the process really applies to a lot of funds that have had manager changes. You probably will encounter some other funds with colorful histories that immediately inspire similar feelings.

Each manager of Fidelity Magellan has remade the strategy and portfolio to his own liking. Some have been low turnover S&P 500 huggers, others fast-trading all-cap investors. This time it sounds as though Feingold aims to tone down his predecessor's bold moves and make the fund a bit more like its peers and benchmark. But, of course, that doesn't tell you whether the fund will underperform or outperform, only that it may follow peers and benchmark a little more closely. Feingold did produce decent returns at Fidelity Trend FTRNX, but that fund was much smaller than Magellan.

So, what does that add up to? For us, it's a Neutral rating. We want to see a few portfolios to really understand how Feingold is running the fund, and longer term we want to see how the fund performs. The Morningstar Analyst Rating is not carved in stone. 

At Legg Mason Capital Management Value, the story is a little different. Peters has worked as Miller's comanager and has gradually transitioned the portfolio to his view. So, while Miller is no doubt influencing Peters' work, it's really a new day at the fund. Peters, too, had a decent record years back at Fidelity before he came to Legg Mason in 2005. However, he has a poor record at Legg Mason Capital Management Special LMASX, which has lost 3% cumulatively since he took the helm at the end of 2005 while the fund's benchmark gained 47%. Again, we need to see exactly what he's doing at his new charge and how well the fund performs under different conditions. We rate the fund Neutral.

If you tune out these types of funds completely, you miss out on the possibility that they could be good investments in future years. Fidelity New Millennium FMILX, for instance, has had a good second chapter after the legendary Neal Miller retired.

While you should keep an open mind, though, for now keep your wallet closed. These works in progress are best observed from afar. I wouldn't buy or hold on simply because there's a chance of a turnaround. With plenty of proven managers and strategies out there, you don't need to settle.