Sat, 8 Mar 2014
The specifics surrounding a manager transition can impact our certainty of a fund's propensity to outperform in the future--and hence our Analyst Rating.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
Quality of management plays a huge role in Morningstar's Fund Analyst Rating system. Joining me to discuss three recent management changes is Russ Kinnel, director of fund research for Morningstar.
Russ, thank you so much for being here.
Russ Kinnel: Good to be here.
Benz: Russ, let's start with a fund that we have long covered and long liked quite a bit. Selected American recently announced that longtime manager Ken Feinberg was going to be stepping down. Let's talk about that change and how you, as head of the ratings committee, view that change and how it's affected the fund's rating.
Kinnel: It was bit of a surprise, because Ken Feinberg was a longtime co-manager. I saw him as more or less an equal with Chris Davis. So, to see him step down was a bit of a surprise. The fund has had mediocre performance in the last five or six years, stronger performance over the long term.
When we thought about it, we thought ,well there are some good analysts there, but it's still a blow to lose a key member of the team. So we lowered the fund from Silver to Bronze.
Benz: Who is taking over for Feinberg in that co-manager role?
Kinnel: Danton Goei who is a longtime analyst--really their top-performing analyst--who has contributed lot of good ideas. He was promoted to replace Feinberg on the fund. It seems like a logical promotion, but again it's a loss to see Feinberg go.
Benz: One of Feinberg's big areas for the fund was the financials space. Do you expect the fund will continue to have a big emphasis there, or do you think that will scale back a little bit.
Kinnel: I think it'll probably still be a big area of emphasis, maybe scaled back a little. But I think there will still be a lot of financials. Chris Davis has an interest in financials as well. So I don't expect it to go away completely.
Benz: The fund is moving from Gold down to Bronze. I'm a fundholder, and I'm wondering how should I use that information? Does that mean it's still something that I should hang on to? How should I construe that ratings downgrade?
Kinnel: We view all Medalists as funds with a likely opportunity to outperform over the long haul. We still think this is a good fund, but it is a fund with some limitations. We're a little less certain than we were before; it is a setback to have a have a key manager go.
Chris Davis, however, and the other analysts at the firm are still there, and it's still a good operation. We don't think the strategy is going to change. So, there are lot of positives, but we're little less certain than we were before.
Benz: Another fund I want to talk about is T. Rowe Price Growth Stock. This has also recently seen a manager change. Let's talk about the evaluation that went on there when you found out the manager was departing.
Kinnel: Rob Bartolo is stepping down and being replaced by Joe Fath. Bartolo built a great record, which is why we rated it Silver. Fath has shorter record, running an institutional large-cap growth fund for T. Rowe Price as an associate portfolio manager. Associate portfolio managers are generally not the ones making the day-to-day decisions on what goes in the portfolio. They have an important hand in things, but it's not the same.
When you look at it that way, that's what led us to go from Silver to Neutral: his less-meaningful track record. The positives would be that, obviously, he's very familiar with large growth, because that's what he was investing in before. Also, his strategy appears to sound very similar to his predecessor's--a straightforward growth approach. So we don't see a big strategy shift. But he's just a less-proven manager.
Benz: And T. Rowe gets some good scores for expenses and stewardship as well.
Kinnel: That's right. T. Rowe is a good steward, and the fund is low-cost. Generally manager transitions don't lead to huge, jarring strategy changes. Those were all positives; it's just that there is less evidence that we now have a good manager than there was before.
Benz: So that movement from Silver to Neutral, at Neutral that means that our analysts just don't have a lot of conviction that it will necessarily outperform its peers.
Kinnel: That's right. There is a lack of evidence to make the case that this is a fund that will likely outperform. We just don't have enough track record on the new manager.
Benz: Stepping back a little bit, Russ: T. Rowe in the past had been a firm really known for consistency of management. We've seen a few major manager changes over the past year or so at T. Rowe. Is that a concern to you, when you think about what had been such a great long-term advantage for the firm, which is the ability to hang on to managers?
Kinnel: Yes, it is a concern. We've seen Joe Milano and Kris Jenner leave, and it really is a worry that they've lost some key people. It's not yet a mass exodus from T. Rowe, but we have just seen three managers and a couple of analysts leave well before retirement. It's one thing to lose someone to retirement, but these are people who are going elsewhere, generally to run money somewhere else. That is a real concern for us.
We thought some of these managers were relatively young and had a number of years ahead of them running money. So it's something we're watching closely.
Benz: Those two funds, Selected American and T. Rowe Price Growth Stock, actually saw downgrades. Another fund I want to talk about is Harbor International. Even though it had a manager change, we have kept its rating the same. Let's talk about the story there and why you and the team continue to have a lot of conviction in that fund.
Kinnel: They announced that Ted Wendell is going to retire this year, or at least step down off of the fund--but he is one of four. When we evaluate a manager change, we really want to understand how much was the departing manager contributing, how much have the existing people contributed, how much of the old record do they own? And in this case, he was one of four, and we really feel good about the existing team there, so we're maintaining our rating, because we feel like it's still a really strong fund. We still rate it Gold. We still have a lot of conviction in the existing managers. It's a very good value-oriented process. It's gotten a lot of asset growth, which is something we're going to keep our eye on, but we still feel strongly about the fund.
Benz: And that one has relatively low expenses on its side as well.
Kinnel: Right. It's low cost. It's a very good, sound value strategy. Look at the performance and you can see that they've done a great job. The fund was formerly run by Hakan Castegren, who passed away a few years ago. But even before then, the existing management team had long contributed a lot to the fund. So, we give the current managers credit for even some of the earlier years before Castegren died.
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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