Fri, 14 Nov 2014
What to make of recent changes at T. Rowe Price, Fidelity, Artisan, and First Eagle.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Several high-profile mutual funds have recently seen manager changes. Joining me to discuss some of them is Russ Kinnel. He is director of manager research for Morningstar.
Russ, thank you so much for being here.
Russ Kinnel: Good to be here.
Benz: Russ, we've recently seen some fairly high-profile manager changes. I'd like to take them one by one, and I know you help steer the analyst rating committee. So, I'd like you to talk about how the manager changes have affected our ratings on these funds.
Benz: Let's start with First Eagle Global (SGENX). It's a fund that we have long liked, but Abhay Deshpande recently announced that he's stepping off the fund. Let's talk about that fund. We did downgrade it as a result of this manager change.
Kinnel: That's right. We downgraded the fund from Silver to Bronze, and that tells you we still obviously like the fund. You have two good managers in place, Matt McLennan and Kimball Brooker, who are still there. But Abhay was one of the three managers running the fund, and our concern is that this comes at a time of tremendous asset growth. They've got over $60 billion they're running. In the past, their funds had been closed earlier. They have closed one fund but not the other, which means they could still grow. So, we feel like the two managers left are stretched a little thin. We feel like they'll still do a good job, but we worry that they are stretched a little thin. So, it's really that asset size and losing that manpower at the same time that gives us concern.
Benz: You and the team generally still like the strategy in place here, though?
Kinnel: I really like what First Eagle does. It's a strategy pioneered by Jean-Marie Eveillard at the firm, who has long since retired. But the idea is to really protect investors from the downside while still giving good upside. They are conservative global-equity pickers. They try to find stocks that are relatively cheaply priced and, therefore, have less price risk. They will hold gold, they will own some cash if there aren't enough attractive opportunities. And if you look at the long-term risk/reward profile, it's just great. You get almost all the upside in a rally and significantly less downside in a sell-off. So, we really like the strategy, and given that the markets are up a lot, it's not a bad one to own. But again, it's important to recognize that you have tremendous asset growth there and now one fewer manager.
Benz: Let's look at another one. This is T. Rowe Price International Stock (PRITX). Bob Smith announcing that he's stepping off this particular fund. It sounds like he will stay at the firm in contrast with our Abhay Deshpande. Let's talk about that change and how it influenced that fund's shift to a Neutral rating.
Kinnel: That's right. We lowered the fund to Neutral. Richard Clattenburg will take over the fund, and he's been an associate portfolio manager on the fund for a couple of years, but he'll obviously be stepping up significantly when this change takes place--which is April 1, 2015. So, you're transitioning from a very seasoned manager--Smith had a record at other funds before he came on this one--and now you've got a manager who doesn't really have his own track record, though, of course he is at least experienced in this strategy. So, it is a significant step down, and that's what the Neutral rating reflects.
Benz: Bigger picture, I'd like to discuss the fact that we have seen a number of manager changes at various T. Rowe Price funds over the past year. Are you concerned about that when you think about stewardship at the firm? Historically, T. Rowe Price has been pretty placid in terms of hanging on to managers. This appears to represent a little more turmoil there.
Kinnel: In the last, I would say, 18 months, we've seen key manager departures kick up a little. Now, some of it's retirement, but others have gone off to start their own firms or have gone to other firms. So, yes, it is a concern. We will be watching it closely. It isn't yet elevated to the point where we are really worried about a big exodus. You're not seeing clients really leave. So, we still think they're a pretty stable firm. But it is enough that we're worried, and we're certainly watching it closely.
Benz: Another fund, Fidelity Small Cap Value (FCPVX), is also seeing a manager change. Chuck Myers is going to focus on Fidelity Small Cap Discovery (FSCRX) and step off of the value fund. Let's talk about that change and how it influenced the rating.
Kinnel: This was a change that was announced at the beginning of November. Chuck Myers will transition from lead manager to comanager, and Derek Janssen will be elevated to lead manager on Jan. 1, 2015. There will be a yearlong transition and, by Jan. 1, 2016, Chuck Myers will be completely off the fund. So, we lowered the fund from Silver to Bronze to reflect the fact that Myers has a brilliant record. He is a very good Warren Buffett-influenced value investor whom we really like. So, having him move off is definitely a disappointment. We like, though, that Fidelity is having a long transition here. They are giving shareholders a long time to figure out what they want to do, giving us a long time to get to know the new manager. So, we really like the transition. Janssen has been on the fund for a little while, so he knows Myers' strategy--and Chuck Myers is going to stay at the firm, obviously. He is going to still run a different Fidelity fund. So, that's a positive as well. But again, you're losing the lead manager who's produced a great record.
Benz: Another fund that is seeing a manager change is Artisan Mid Cap (ARTMX). This one, in contrast to the previous three, did not influence a ratings change. We left the rating the same. Let's talk about that one.
Kinnel: That's right. So, Andy Stephens, who had been the lead manager until a year ago, then was named a comanager--not the lead--a year ago, is now stepping off as manager, et al. So, that's obviously a negative. But the team around him is a strong one, so we feel like that's pretty robust, and there will be a lot of help. But, also, he is going to stay there. At Artisan, you have to give three-years notice that you're leaving the firm, and he hasn't given that yet. So, he wants to reshift and move into focusing on research and some other things, not the portfolio management piece. But he's obviously still going to be there contributing to the team. So, it's an even more subtle transition. So, we still feel like it's a strong team there with a good record that led us to maintain the fund at Silver.
Benz: This idea of managers needing to give notice before they leave the firm, it's kind of unusual, but it seems like you think that that's a good idea. Why is that?
Kinnel: Managers are fiduciaries. They owe a lot to their shareholders, and I think committing to that long runway of notice is really in shareholders' interest, because you want a smooth transition. You want to know well in advance. Investors commit a lot to fund managers, so it's good for them to commit some back. I really like the way Artisan has that [three-years notice] so the managers really are there for a long time, and they have to give you a long, advance notice. It means when they do leave, they've got plenty of time to build everyone up, to hire new people if needed, and train everyone. So, it really allows for a long lead time.
It reduces the disappointment. I think anyone who has owned funds for 10 years or more has had the moment of seeing some manager they really like leaving quickly and the shock of that. So, I think you can appreciate, if you've had that experience, why something like an Artisan setup is valuable. We talked about those other two setups, where at T. Rowe and Fidelity, you have these longer transitions. They don't require their managers to give three-years notice. But even so, I think it's about having a smooth transition, about giving long, advance notice.
Benz: And it helps avoid that mad scramble when a manager leaves all of a sudden.
Kinnel: Yes. I don't know of any particular recent examples that come to mind, but yes, that's not ideal.
Benz: Russ, thank you so much for being here to share your insights on these recent manager changes.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.