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When Managers Change, So Can Ratings

Mon, 10 Jun 2013

Recent manager changes at T. Rowe and Janus resulted in Analyst Rating downgrades, says Morningstar's Russ Kinnel.

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Video Transcript

Christine Benz: Hi. I'm Christine Benz for Morningstar.com.

A fund manager change isn't always a cause for selling, but it is a reason to do some further research. Joining me to discuss some recent high-profile manager changes is Russ Kinnel. He is director of fund research for Morningstar.

Russ, thank you so much for being here.

Russel Kinnel: Good to be here.

Benz: Russ, let's talk about some recent high-profile manager changes. We wanted to start with T. Rowe Price New America Growth. This is a fund that we had rated Gold prior to its recent manager change. Now we've got it down at Neutral. Let's talk about what's gone on there.

Kinnel: Joe Milano left at a fairly young age, so it's a real surprise. Dan Martino has taken his place, moved up from the Media & Telecom Fund, which is a fund that's really done very well.

If you look at the past record of managers moving from that fund to diversified funds, one manager, Henry Ellenbogen, has had success; one manager has had not so much success, Rob Gensler at Global Stock. And so, we're a little cautious. Martino had a good record at Media & Telecom, but we want to see what he does at New America Growth. So, we've taken it down to Neutral. There are some positives there, but it remains to be seen what he will do.

Benz: So positives, obviously, being a really nice, deep analyst team that he can draw upon. How do you think the strategy will be different, or the same as Milano's? Any sense of that?

Kinnel: We still haven't really seen. There may be some tweaks. Historically, T. Rowe does not change strategies very much. So I'd be really surprised if it's no longer a large-growth fund, or if it isn't relatively similar. So, there are some questions on strategy, but not dramatic. It's more about execution really, will he do as well as Milano at picking among a more diversified pool of equities?

Benz: One question I have for you, Russ. This is the second month in a row where we've talked about a significant manager change at a T. Rowe fund. Last month we talked about Kris Jenner leaving T. Rowe Price Health Sciences. I think the bigger question now is, is there something bigger afoot at T. Rowe Price, which has historically done a really good job of hanging on to managers?

Kinnel: They say flatly no, there is no connection, and I'm inclined to believe them, because their track record is very good. They're a very stable firm. But you want to watch, and certainly we'll be looking for any signs that maybe there are any themes or if more people leave. So, it's a bit worrisome, but it wouldn't lead me to sell an existing T. Rowe fund where I feel good about the current manager.

Benz: Let's shift gears to discuss a firm where there has been more of a history of managerial instability. That's Janus. And what we saw there recently was that manager changes on Venture Fund and Triton set off a few other manager changes. So let's talk about what happened with Triton as well as Venture.

Kinnel: Unfortunately, the managers--Chad Meade and Brian Schaub--left to go to another firm, and they were really Janus' best equity managers. So it's a real blow there. They were about six years in at Triton. I think they took over Venture about four years ago. And they produced outstanding returns. Unfortunately, Janus has not held on to their top managers very often, and so it's really frustrating, I think, for Janus shareholders.

Benz: So we're moving those funds from Silver to Neutral. Jonathan Coleman is taking over those funds.

Kinnel: That's right. Coleman is an experienced Janus manager, but his record is mixed. He had been at Janus Fund, where he had actually underperformed over his tenure there--some of his other funds, he had done a little better--but it's definitely a drop-off going from managers with such strong track records to someone with a much more middling record.

Benz: Jonathan Coleman then is stepping off of Janus Fund. Who is taking that fund over?

Kinnel: His co-manager, Barney Wilson, had run a tech fund at Janus with some success and had been a co-manager on this fund for a couple of years. So, we really, again, don't know, taking over a very big diversified fund, how he will do. So, it's really early stages in finding out what this fund is going to be like.

Benz: So we had that one at Neutral; we're keeping it at Neutral.

Kinnel: That's right.

Benz: More broadly, when you look at Janus, Russ, you wrote that it's been three steps forward, two steps back, for the firm over the past several years.

Kinnel: That's right. If you look at it, there has just been a regular series of changes and manager departures. If you look all the way top of the firm, the CEO has changed. We're on our third CEO in the last--I don't know--six or seven years, and each one has run the firm a little differently. So, I feel like there are really strategic shifts coming down from the top, and unfortunately we're also seeing mangers leave, possibly as a result of those shifts, and it's kind of sad that Janus hasn't done a better job of holding those really good managers that it has been able to develop.

Benz: Let's talk about Harbor International Growth. A lot of people watching probably know and own Harbor International, which is a value-leaning international fund. This is the growth version. It recently had a manager change as well.

Kinnel: That's right. International Growth has a different subadvisor from International. So, don't worry if you own the International Fund.

But on the Growth Fund, Harbor has fired Marsico and manager Jim Gendelman, and replaced them Baillie Gifford, which subadvises portions of some Vanguard funds. We're keeping the fund rated Neutral, because Baillie Gifford--they are OK, but they are not great either. But I think it's really telling what this says about Marsico, because Harbor is very patient, and here they are letting go of a subadvisor, which they don't do very often. And as you know, Marsico has had problems with some manager and analyst departures. They've hired to replace most of them, but I still think it's got some people worried, including obviously Harbor.

Benz: Right. So this is a fund we had at Neutral before. We're actually dropping it from coverage going forward.

Russ, I wanted to finally talk about some research that you recently conducted where you looked at manager changes as a phenomenon, and you looked at whether it is, in fact, predictive of future manager changes. So can you summarize that research for people watching?

Kinnel: So it turns out that where you have manager changes in the past, you're much more likely to have more manager changes in the future. Firms or funds that haven't had many manager changes are much less likely to have manager changes. So you see when we change funds' ratings after a manager change significantly, this is part of what we're looking at. We know that an increase in manager changes tends to keep recurring, and so you don't want to be too naive and think, well, now it will stop. We really see that these patterns can continue for quite a while.

Benz: So is this the kind of thing that would affect the parent grade of a fund score, as well as its overall rating?

Kinnel: Yes, certainly. One of the things we look at when we grade a parent company is their manager retention rate, so what percent of managers are staying on board. Obviously, at Janus, this is a real concern, where you've seen some managers leave, and though they still have some good ones left, it doesn't have the stability that you've had at a really top-level firm.

Benz: By contrast, can you give a couple of examples of firms that have historically done a really good job of hanging on to managers?

Kinnel: I think Dodge & Cox has done a very good job. T. Rowe, though they've had some issues lately. Vanguard has done a pretty good job, though they have a subadvisor model for the most part, but some of their subadvisors, like Wellington or PRIMECAP, have been very good at keeping managers and analysts in the fold. In places where people want to make a career, you see this very long-term stability.

Benz: Russ, thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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