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Skippers Struggling to Add Value

Despite experienced investment pros and support, these funds haven't delivered.

Greg Carlson, 09/27/2012

Anyone familiar with the argument for passive investing knows that active managers, on average, have a tough time beating their benchmarks net of fees--particularly when risk is taken into account. Below, we take a closer look at funds where managers have been on board for at least a few years, yet have lagged their bogies on a risk-adjusted basis during their tenures.

Janus Fund JANSX,
Janus Growth & Income JAGIX 
The past couple of years have been a tough slog for most of Janus' U.S. large-cap funds, and these two aren't exceptions. In November 2007, Jonathan Coleman took the helm of Janus Fund when David Corkins left the company, and Marc Pinto replaced the departing Minyoung Sohn at Janus Growth & Income. (Corkins and Sohn left to form their own firm.) Both funds landed in the bottom quintile of the large-growth category--and well behind their benchmark, the S&P 500--in 2010, in part due to an increased focus on very large, sturdy companies in a year where smaller, cyclical companies performed better. Both funds (especially Janus Fund) then moved off that stance going into 2011, incorporating more mid-caps into the mix. That only made things worse, though, because investors fled to huge, stable firms in 2011. So the funds again lagged the S&P. (Thus far in 2012, Janus Fund is modestly ahead of the index while Janus Growth & Income is slightly behind.) All told, Coleman at Janus Fund and Pinto at Janus Growth & Income are an annualized 1.3% and 2.5% behind the S&P 500, respectively, during their tenures.

Fidelity Disciplined Equity FDEQX 
If quantitative funds in general caught a cold during the turbulent past few years, this one came down with pneumonia. Many funds that use momentum-oriented quant models had difficulty navigating the twists and turns of the October 2007-March 2009 bear market, stocks' sharp reversal upward, and the often macro-driven nature of the market since then. However, this large-blend fund is lagging the S&P 500 for the fifth year in a row and has only beaten its benchmark once in a calendar year during manager Keith Quinton's nearly six-year tenure. Since he took the helm in October 2006, the fund has lagged 90% of its peers and is an annualized 2.7% behind the S&P. Fidelity has very few quant funds, and it's easy to see why.

Mutual Beacon BEGRX 
It may be a surprise to see this fund make the list. The Mutual Series team, once headed by Michael Price, gained its fame by employing a cautious value strategy that delivered strong risk-adjusted returns. This team's funds usually struggle a bit in big rallies, but outperform by holding up better in downturns and choppy markets. But this one has acted differently in recent years. It got caught holding a big stake in financial stocks, which were hammered in 2008, and lost to more than three quarters of its large-value peers (and its benchmark, the S&P 500) that year. And the fund uncharacteristically surged past competitors in 2009's bounceback led by cyclical fare. It lagged the S&P and the large-value category norm in the fairly different market environments of 2010 and 2011, and is now an annualized 3.3% behind the S&P 500 since longest-serving manager Christian Correa came on board in January 2007. (It's also behind on a risk-adjusted basis.)

Correa isn't entirely responsible for the fund's weak record over that period; Michael Embler comanaged the fund from 2005 until he departed the firm in May 2009. (That's just one of many departures the Mutual Series team has seen in recent years.) But Correa and comanager Mandana Hormozi (who was promoted soon after Embler left) have run the fund since then, and it trails the S&P by an annualized 4.1% (and on a risk-adjusted basis) as well as 80% of its peers over that span. In the meantime, the fund's volatility, while still below that of the S&P and its typical peers, has crept up.

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Greg Carlson is a fund analyst with Morningstar.

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