Can you read between the lines of some fund-company maneuvers?
Some changes have obvious implications for fund investors. A manager change, for example, is of the utmost importance, as investors have to figure out what impact it has on the fund's outlook. (My colleague Russ Kinnel recently examined nine 2012 portfolio manager changes to help answer that question.) Strategy changes are similarly important, because investors have to decide if the new strategy fits their overall portfolio allocation or if the "new" fund will match their risk tolerances and time horizons. Fund-company mergers should also raise eyebrows, as fund-company managements may have plans for rationalizing newly combined fund lineups or making other changes in the name of synergies and efficiencies.
Implications of other changes at fund families aren't as cut-and-dried, though. Should investors take note when fund complexes create new sales positions, for example? That could indicate a greater emphasis on asset growth, which would be worrisome, or just a response to investor interest or a happy opportunity to bring in skilled practitioners. Below is a look at some recent fund-company announcements and what they could mean for fund investors.
Third Avenue Makes a Notable Hire
Reports recently leaked about Third Avenue's hiring of David Resnick, who has made his name as an advisor on bankruptcies and restructurings for many years and who in fact had worked with fund-family founder Marty Whitman on Public Service of New Hampshire's restructuring in the late 1980s. Resnick will officially join Third Avenue in September 2012, working both on the investment side as well as in fund-company operations.
This announcement comes on the heels of Third Avenue's recent partnership with another special-situation advisor, Millstein & Company, and just three years after Third Avenue launched Third Avenue Focused Credit TFCIX, which is focused on distressed debt and bank loans and which prompted the hiring of several more analysts specializing in the area. (All of Third Avenue's other funds can also engage in distressed investing to some extent.) It also comes just three months after Whitman relinquished his portfolio-management duties to comanager Ian Lapey on Third Avenue's flagship Value TAVFX fund. Although Whitman is 85 years old, he is not leaving the firm and continues to contribute to the research process as well as manage private accounts for clients. (Lapey himself has a firm hold on Value's reins.)
Third Avenue says it has no plans for more mutual funds and says its existing funds (other than Focused Credit) do not plan to increase how much they are allowed to invest in distressed debt. However, in the tight-knit network of bankruptcies and reorganizations, Resnick's rolodex and expertise (as well as Millstein & Company's) should come in handy for many years to come. Overall, it's a positive development for a firm that has succeeded with distressed investing in the past.
MFS Undertakes Major Rebranding Effort
MFS recently announced a rebranding effort, which includes a new logo and tagline--"Building Better Insights." Investors may wonder if this new branding brings a new identity for one of the fund industry's oldest firms. The short answer is that it doesn't--MFS' team-oriented culture is strong, and turnover among portfolio managers and analysts is low. MFS also maintains its commitment to high-quality investing and risk control. But what's going on behind the scenes is interesting nonetheless.
Overall, MFS has done well over the past decade. While there have been some fund mergers and new funds, the vast majority of the funds it offers today boast five- and 10-year returns that rank in the top halves of their categories and look even better on a risk-adjusted basis, thanks in large part to their ability to survive 2008's market woes better than most peers did. On the asset front, the firm has grown overall. As of the end of May 2012, it held more than $90 billion in assets in its mutual funds, up from $64 billion a decade ago.
But the mix has changed. Much of that growth has come from MFS' international funds, including MFS International Value MGIAX and MFS Emerging Markets Debt MEDAX more recently. Today the firm has more assets in international funds than it does in domestic-equity funds. Moreover, the firm has been selling well in institutional channels. Whereas a decade ago, virtually all of its sales and assets were through financial advisors, today more than half of its assets are through the institutional channel. In fact, the fund's advisor-sold share classes have experienced net redemptions in many cases over the past several years, though some of that can be blamed on investors' general disdain for equities and moves toward passive investing.
One characteristic the institutions probably like is MFS' style consistency, clearly an important feature to the firm as evidenced by its attention to benchmark risk, or how the funds' portfolios look and behave relative to various index attributes. MFS' old tagline, "Choose What Fits," worked well in that environment and resonated with financial advisors who at the time were likely building portfolios using the Morningstar Style Box, among other tools.
Whereas MFS will no doubt remain cognizant of its funds' benchmarks, the rebranding puts more emphasis on the firm's global nature and teamwork. It's right to do so--attribution results show strong stock-picking out of its analyst corps--and the firm can make meaningful distinctions in its portfolios. Whether that can re-engage the financial-advisor constituency, though, remains to be seen. Meanwhile, investors shouldn't notice any real change in MFS' character.
At Legg Mason, a Smaller Rebranding But a Bigger
Branding is more difficult at Legg Mason than at MFS, because the former owns a collection of investment boutiques that are run fairly independently of the parent company. Each affiliate has its own CEO, for example, though each relies on Legg Mason mostly for distribution support. For its part, the parent company has to strike the right balance between highlighting each affiliates' unique attributes and connecting them to the parent company.
Over the years, Legg Mason has used different approaches. For example, it has never attached the Legg Mason name to the Royce funds. As a result, Royce seems the most distant from the parent firm. Meanwhile, its other affiliates' funds have undergone other name changes; in early 2010 the label "Legg Mason" was added to most share classes of all of the funds (except Royce's) to create a more-unified front.
The firm recently retraced its steps on one of the affiliates, however. Beginning Aug. 1, 2012, it will remove the Legg Mason name from its Western Asset affiliates' funds. Western Asset is the largest contributor to the funds' assets under management, considering both its mutual funds and its institutional accounts. In addition to this rebranding, Legg Mason is proposing mergers for several Western Asset funds and announcing strategy tweaks on others.
Investors in Legg Mason funds might be wise to keep their ears open for other changes. The firm has suffered shareholder redemptions in most months since mid-2007 as many of the firm's flagship funds, including the most well-known Legg Mason Capital Management Value LMVTX, have floundered since the 2008 market meltdown. (Indeed, Legg Mason Capital Management Global Growth LMGTX is undergoing changes of its own, switching to a global growth mandate from a U.S. growth approach and adding a comanager.)
Morningstar equity analyst Greggory Warren says the firm has positive attributes, including (still) the scale to be competitive, a diverse business mix, and improved recent performance from several affiliates and Western Asset in particular. He also notes, however, that a turnaround is complicated by the firm's complexity and would be dependent on strong performance--something hardly guaranteed.