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Evaluating 3 Big Mutual Fund Handoffs

Should you stay or should you go?

Russel Kinnel, 08/23/2012

This article originally appeared in Morningstar FundInvestor.

Some of the trickiest handoffs in the fund world happen at the retirement of renowned managers who run idiosyncratic strategies that are a manifestation of their personalities. Not only are the successors filling big shoes, but they also have to decide how much they want to change the strategy in light of investors' expectations. After all, investors didn't come to Third Avenue Value TAVFX,
First Eagle Global SGENX, or Columbia Value & Restructuring UMBIX for plain vanilla.

As fund investors, we must be particularly alert to changes at such funds while at the same time assessing the abilities of the managers and analysts in charge. Quirky strategies make for quirky returns, and it takes a longer time period to really judge them. Look back over their histories and you'll see these funds have gone in and out of favor a few times even though their long-term returns look appealing.

In June, I moderated a panel of managers running three funds that had recently made the switch. I felt our Analyst Ratings for the funds were validated by what I heard, but with the funds in transition, those ratings are hardly carved in stone.

First Eagle Overseas SGOVX and Global SGENX
I imagine investors feel the best about these two because the record under current management is the longest and it has also been pretty good. Jean-Marie Eveillard and Charles de Vaulx did a brilliant job of protecting against losses while still producing strong long-term returns, and the funds have continued to perform in a fashion you'd expect. They lost less than most in 2008 and 2011, and five-year returns are top quartile for both funds. The five-year return is probably the best one to use here as comanager Abhay Deshpande's tenure dates to September 2007. Matthew McLennan was named comanager on Sept. 12, 2008, and Kimball Brooker became comanager in March 2010. You could also argue that the three-year record is most telling because Eveillard retired in March 2009.

Both boast solid three-year records, too, although Global's is a bit stronger. More importantly, the strategy guiding the funds doesn't seem to have changed. Deshpande worked for years with Eveillard, and McLennan was brought in because he seemed a good fit with the strategy. So you have funds focused on capital preservation that will hold cash, bonds, and gold alongside an array of global value stocks. The chief difference is that Global has about 34% of assets in United States stocks, while Overseas owns virtually no U.S. stocks. As a result, Overseas' recent returns are a bit behind Global's. The fund's have kept the strategy intact, so I'll just watch to see how well they execute.

Third Avenue Value TAVFX
After the panel, the first question I fielded was why, given its poor three-year numbers, Third Avenue Value received an Analyst Rating of Silver. (By mid-August the year-to-date performance was actually quite strong, three-year figures less so.) For starters, Third Avenue has built a strong stable of analysts and managers, each of whom apply Marty Whitman's "safe and cheap" mantra. Lapey has worked at Third Avenue for more than a decade and was named comanager in July 2009. Whitman handed him the keys in March 2012 when he stepped down from the fund (but not from the firm).

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.
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