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Can These Old Dogs Learn New Tricks?

Manager success at one fund doesn't always translate into success at another.

Flynn Murphy, 07/26/2012

One of the trickier types of manager changes is one in which the new manager is experienced but trying to run a different strategy for the first time. Success in one area doesn't always translate to another. If you own a fund in that situation, give it a long, hard look before you decide to hold on.

When successful managers struggle in new territory, the consequences can include fund liquidation. Oppenheimer Champion Income OPCHX presents a cautionary tale. After the fund suffered a catastrophic 79% loss in 2008, Oppenheimer replaced its managers with the veteran team running Oppenheimer Senior Floating Rate OOSAX, which has a Morningstar Analyst Rating of Bronze. Led by Joseph Welsh, the new team took a purer approach to high-yield investing, buying only below-investment-grade corporate bonds--particularly B and CCC rated issues. Welsh and his team of eight analysts specifically avoided stakes in mortgage-backed securities, which had plagued their predecessors. The team continued to produce strong results at their bank-loan charge, which sported a higher-quality portfolio. But Champion Income's distinct high-yield profile proved its own challenge, as different factors can affect the performance of below-investment-grade bonds. During the three years under Welsh and company through April 2012, Champion Income lagged 87% of its high-yield category peers and acted with more volatility, as measured by standard deviation. On May 21, Oppenheimer signaled an end for Champion Income, announcing the lagging fund's assets would be merged into multisector bond fund Oppenheimer Global Strategic Income OPSIX.

At Fidelity, it's not uncommon to see portfolio managers running smaller, more narrowly focused industry funds get promoted to run diversified funds. In January, for example, Fidelity gave Daniel Kelley, portfolio manager of the $220 million Fidelity Select Construction & Housing FSHOX, responsibility over the $1.2 billion large-growth Fidelity Trend FTRNX. It's unlikely Kelley will make extensive changes to the portfolio, but he will employ a distinct approach from his predecessor. The fund's sector weightings will remain in line with the Russell 1000 Growth Index's, but Kelley will employ a valuation-conscious approach, adding high-quality stocks with solid balance sheets. Though Kelley's record at his previous fund is impressive, his lack of experience outside that narrow investment universe led us to assign a Negative Morningstar Analyst Rating to the fund.

In January, Fidelity Select Banking FSRBX manager Vincent Montemaggiore was installed at the helm of Fidelity Overseas FOSFX, a diversified international fund. Breaking from his predecessor's growth-at-a-reasonable-price approach, Montemaggiore will use quantitative screens focused on valuation and return on invested capital. He is working to make the fund less concentrated, too, bringing the top-10 holdings down to 18% of assets in March from 36% of assets in December. In April, Chris Lee, portfolio manager of the $200 million Fidelity Select Consumer Finance FSVLX, was promoted to lead the $1.8 billion Fidelity Growth Strategies FDEGX. It's an open question how Lee and Montemaggiore will do at these funds, but it's probably not worth sticking around.

Aster Investment Management faced a different challenge when founder Rick Aster died in February. Aster was lead manager at Meridian Growth MERDX since the fund's inception. James England, portfolio manager of Meridian Value MVALX, was tapped to help run Meridian Growth with current manager William Tao, who worked closely with Aster for five years. Aster Investment Management also hired Larry Cordisco as comanager on Growth. Cordisco had helped run Meridian Value before leaving the firm in early 2011. While England and Cordisco didn't have a direct hand in running Meridian Growth before Aster's death, they are capable of executing the strategy alongside Tao. We rate the fund Neutral mainly because of the uncertainty surrounding the ownership of the firm. Aster’s estate is planning on selling its majority stake. It is unclear what changes a new owner would make.

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Flynn Murphy is a mutual fund analyst with Morningstar.
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