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When a Manager Change Means More of the Same

Two recent manager changes at Goldman Sachs illustrate how other factors can mitigate the disruption.

Laura Lallos, 03/05/2015

A change at the top of a fund naturally sparks a review of a fund's Morningstar Analyst Rating. But as Morningstar's director of manager research Russ Kinnel recently noted, fund manager changes don't usually warrant a rush to sell. Upon review, a manager change may not lead to a rating change. These transitions still bear watching, though. Two recent manager changes at Goldman Sachs Asset Management are worth highlighting not because the funds are recommended--both retained Analyst Ratings of Neutral--but because they serve to illustrate how other factors can mitigate the disruption.

Sean Gallagher, CIO of GSAM's U.S. value equity team, made a manager change at Goldman Sachs Mid Cap Value GSMCX last month. Longtime team member Andrew Braun, who had served as co-lead portfolio manager since 2010, was replaced in that role by Timothy Ryan, an analyst on the fund and co-lead on Goldman Sachs Real Estate GREIX since 2010. Ryan will run the fund alongside Dolores Bamford, who has been on the team since 2002 and a co-lead manager since 2006. This change, and the fact that the team needs to replace a materials analyst who left in 2014, factor into the fund's Morningstar Analyst Rating of Neutral.

Shareholders have several factors in the plus column to consider. Gallagher has been a member of the team running this fund since 2001, and Bamford is approaching a decade at the helm. Braun will continue his sector coverage for this strategy, and this continuity is key: Although they are not listed in the prospectus, a number of analysts on the team are designated as "sector portfolio managers," with authority over their picks.

While the fund has seen analyst departures and co-lead manager changes over the years, its relatively high-quality value investment process has remained stable. They focus on mid-cap names with strong free cash flows and high return on invested capital, and they keep sector weightings close to those of the Russell Midcap Value Index. Performance has been comfortably consistent: Over the past decade through February 2015, the fund's three-year rolling returns have been in the top half of the mid-cap value Morningstar Category 85% of the time (although it has beaten its benchmark only about half the time).

We are more guardedly Neutral on Goldman Sachs Growth Opportunities GGOIX. Even before comanager Craig Glassner's sudden departure on Feb. 11, the fund had a Negative rating for the People component of its Analyst Rating. (The rating is based on five Pillars: Process, Performance, People, Parent, and Price.) The loss of Glassner was unexpected but not all that surprising given the chronic turnover on the team: This is the latest in a series of departures that began when the firm decided to relocate its Florida-based team to New York. Longtime manager Dave Shell left, as did a handful of analysts, in late 2011. In April 2013, comanager Scott Kolar, who'd served in that role since 2011, departed along with a few more analysts. At that point, Glassner was promoted to comanager; over the next year, the firm hired five new analysts for this team, representing a third of the overall group. In mid-2014, comanager Jeff Rabinowitz, who had been with the firm since 1999 and served as comanager here since 2011, left GSAM. Current comanager Ashley Woodruff was promoted to the position upon Rabinowitz's departure, having joined the team in 2013 from T. Rowe Price.

Longtime manager Steve Barry has been on the team since joining GSAM in 1999, which provides welcome continuity. However, Barry is also CIO of the fundamental equity team at GSAM, overseeing the firm's U.S. and global equity teams, as well as CIO of the U.S. growth equity group under that umbrella, and a manager on eight other strategies within that group. That is a broad purview, and the comanagers here have had equal authority over the portfolio. The team is now down one comanager, and Glassner's research duties must be divided between two other health-care analysts on the team until a new analyst is hired.

While it is difficult to recommend the fund at this juncture, there is also little reason to expect the fund will experience a dramatic decline. The team supporting the fund is still sizable and experienced overall and follows a reasonable, consistent process. Sector analysts identify firms with sustainable competitive advantages that generate solid cash flows, and the comanagers structure a firmly mid-cap portfolio that avoids significant sector bets. While the fund has endured repeated manager departures, it has remained competitive within its mid-growth peer group. Hence the Neutral rating overall, despite the Negative People score.

In a previous Fund Spy, "When Process Trumps People," we featured some Morningstar Medalists that are strong picks despite their Neutral People scores. While we don't recommend these Goldman Sachs offerings, they do provide examples of how a systematic process can protect shareholders when managers come and go.



Laura Lallos is a former Morningstar analyst and editor, and a frequent contributor to Morningstar Advisor magazine.

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