Some managers quickly invest more than $1 million in their funds, should you follow their lead?
What do you look for in a fund with a relatively new manager?
The first thing is a track record at other funds that indicates the manager has skill. Next, you want other key fundamentals like low costs, high manager investment, a good strategy, and a good fund company.
Looking at some of the shortest-tenured managers in the Morningstar 500, I was impressed by how many had already stepped up to the plate to invest sizable sums in their funds. I'll walk you through some of those examples and then step back to consider that information in the context of other key data. Many of these funds are more suited to your watchlist than your portfolio, but some merit investment today.
First to $1 Million
Lionel Harris didn't mess around. He's the shortest-tenured Morningstar 500 manager to raise his personal investment above the $1 million level. He did it only a little more than one year into his time at Fidelity Small Cap Stock FSLCX. That's a great sign of commitment at his new fund. While this fund's record is pedestrian, Harris' is not. He beat his small-cap growth peer group by 181 basis points annualized in six years at prior charge Fidelity Small Cap Growth FCPGX.
Harris has dialed down his earnings-growth hurdles at this fund but otherwise continues his strategy of looking for strong management, solid cash flows, and a diverse product lineup at companies he buys. The fund is in our small-blend category but clearly has some growth characteristics under Harris. In addition, the fund charges a reasonable 1.10%.
Two other Fidelity funds are next on the list. Fidelity Equity Dividend Income FEQTX manager Scott Offen and Fidelity Magellan FMAGX manager Jeffrey Feingold have invested more than $1 million in their funds in less than two years at the helm. In fact, Feingold is the largest individual shareholder in Magellan. As above, you have funds with poor long-term records but managers with strong records elsewhere. In addition, expenses are low.
However, Feingold and Offen had to alter the strategies that brought them past success. Offen is plying a more disciplined dividend focus here than at Fidelity Value Discovery FVDFX, where he produced solid returns by applying a free-range value strategy. At Fidelity Magellan, Feingold has had to contend with a far greater asset base than he did at Fidelity Trend FTRNX, so it is not a surprise that he has more in mega-caps. He also is shaping his fund around the S&P 500, whereas Fidelity Trend's benchmark was the Russell 1000 Growth. That means that Fidelity Magellan has more in financials and energy than Feingold has had historically.
Because of those relatively big changes, we give Morningstar Analyst Ratings of Neutral to both Fidelity Magellan and Fidelity Equity Dividend Income, though there are certainly some encouraging signs.
We continue with the Fidelity theme as we go to Fidelity Municipal Income 2015 FMLCX, which would seem to be a niche fund, yet Mark Sommer has invested more than $1 million. This isn't a turnaround. It's a fairly new fund designed to mature similarly to a bond. Sommer has done excellent work at other Fidelity muni funds.
Old Manager, New Fund
Next are three of the most intriguing cases. In each, we have managers with past records of success and funds created specifically for them rather than turnarounds that had previous management.
GoodHaven GOODX is run by Larry Pitkowsky and Keith Trauner, both formerly of Fairholme FAIRX fame. We raised this fund to Bronze because we like the strategy they have executed and have gotten to know them and the firm they've built. Pitkowsky and Trauner run a focused, value-oriented fund just like Fairholme, though they appear to be more wary of financials than is Bruce Berkowitz. Both managers have invested more than $1 million, and expenses are a decent 1.10%.
But do they really have a good prior track record? This is the trickiest part in assessing the fund. Pitkowsky and Trauner worked at Fairholme for nine years and were listed as comanagers for part of that time. They were consultants to the fund from 2008 to 2010 before they set out to launch GoodHaven. Clearly, Berkowitz was responsible for most of Fairholme's success, so it's tough to say exactly how much Trauner and Pitkowsky contributed. If the answer is a fair amount, then this is a pretty appealing fund.
David Maley has more than $1 million invested in Ariel Discovery ARDFX, and comanager Kenneth Kuhrt has between $50,000 and $100,000 invested. Maley doesn't have another fund record, but he does have a strong separate-account record going back 10 years. However, this fund doesn't check one of the boxes. Its expense ratio is 1.50% because the fund has a mere $18 million in assets. With a 1.00% management fee and a 0.25% 12b-1 fee, this fund can get less costly, but it won't be cheap. Maley looks for companies with low debt and shares priced at low multiples, and he's done a fine job of it over the years.
Royce Special Equity Multi-Cap RSEMX earned a Bronze rating because we're big fans of Charlie Dreifus. He has produced decades of strong returns at other funds, and we're encouraged by the attempt to branch out from small caps into multi-caps here. The fund isn't cheap, but at 1.36%, it is a fair amount better than Ariel Discovery. Dreifus has historically had funds that lose less in down markets but lag a bit in rallies because he places an emphasis on clean balance sheets and modest valuations. Seeing that he has topped $1 million in the fund reinforces the case here.
A Mixed Bag
PIMCO EqS Pathfinder PTHDX has an interesting split on manager investment. Charles Lahr has more than $1 million, but Anne Gudefin has nothing in the fund. There's a lot to like here, though. The pair produced strong risk-adjusted returns at Mutual Global Discovery TEDIX. This fund really stood out for its limited losses in 2008. As at their prior fund, Lahr and Gudefin look for companies trading at big discounts to their estimates of intrinsic value. PIMCO EqS Pathfinder charges 1.26%, which is par for the course among world-stock funds.
Fairholme Focused Income FOCIX has proved to be something of an odd duck in its three years of existence. Bruce Berkowitz has invested $1 million in the fund (he says he's the largest shareholder). The fund is aggressive not just on credit quality but also with concentration and equity exposure. Berkowitz has a huge bet on debt of bond insurer MBIA MBI, and stocks have topped 28% of the portfolio at times. The idea here is to be an opportunistic income investor rather than what you usually see at a bond fund--a focus on reducing risk or targeting a yield. Berkowitz has a good track record with distressed investing, so we rate it Bronze. However, the concentration risk means it should be only a niche fund. In addition, the expense ratio has risen to 1.00%, which is a tad pricey for its category.
Finally, Chuck Akre has been at Akre Focus Retail AKREX for three years now. Given his long track record at FBR Focus, it's no surprise he's over the $1 million threshold here. Akre has built up a solid team of analysts behind him, too. The fund charges 1.40%, which is a bit high for the peer group but not extreme. In addition, it has been coming down some as assets have grown. Akre's style is a modest growth approach that features a concentrated portfolio of steady growers. The fund rates a Bronze thanks to Akre's excellent record and our growing comfort with the team behind him. It might rate higher if fees were lower.