Christine Benz: Hi, I'm Christine Benz for Morningstar.com. A fund manager change is a catalyst to re-evaluate your position, but it's not always a reason to sell. Joining me to discuss some recent manager changes is Russ Kinnel. He is director of manager research for Morningstar.
Russ, thank you for being here.
Russ Kinnel: Good to be here.
Benz: Russ, some investors may be operating with the assumption that a manager change is always a red flag, always a reason to sell. Is it ever a reason to sell a fund right away if you hear that your manager has changed?
Kinnel: It's definitely always a reason to re-evaluate. I would say it's rare that you need to really jump on it and sell right away. I suppose if you thought this was a fund where only this manager could do what they're doing, if you thought there were going to be so many redemptions that it would actually drive down the holdings in the fund, say it's a small-cap fund, but those are really extreme and rare examples. Generally, you've got time to examine the new manager and look into the process, take your time in evaluating the fund.
Benz: Well, let's talk about that process of deliberation, what you should be looking into. You mentioned you want to look into the new manager's record, certainly, and whatever process he or she will be using. What other things should you try to get your arms around when you hear that there has been a manager change?
Kinnel: So, I want to know what the new manager's experience is, what his or her track record is. Sometimes, they have been a key part of the team for a long time. In those kinds of cases, I know they probably aren't going to change things very much, but I really want to know what their track record is and really understand that before moving on.
Benz: You brought some examples where manager changes, in some cases, did trigger a change in our ratings; in other cases, we held the rating the same. So, let's start with the first fund that you want to highlight. This is Buffalo Mid Cap (BUFMX). In this case, we actually did downgrade the fund when we got news of a manager change. Let's talk about that particular fund and the analytical process that went on behind the scenes.
Kinnel: So, the story is that Kent Gasaway is moving to focus on Buffalo Small Cap Fund (BUFSX) and Dave Carlsen is replacing him as comanager. Bob Male will remain as comanager, so it's just a partial manager change there. And in this case, we don't have a lot of track record on the new manager. But I think what's really crucial to why we downgraded the fund to Neutral is that the fund has really been [underperforming]. In fact, the reason Gasaway moved to [Buffalo] Small Cap Fund was because that fund was also underperforming. And Buffalo had made some manager shifts a few years ago as well. So, shifting managers, consistently lagging performance--you put all that together and there are a lot of unknowns here. There's not enough here to give me confidence to say that this is a fund you ought to buy.
Benz: So, we had it Bronze and we moved it to Neutral.
Kinnel: That's right.
Benz: Let's take a look at another fund where, despite a manager change, we kept the rating the same--that's Vanguard Short-Term Federal (VSGBX). Let's talk about the thought process that went behind maintaining that rating of Silver for that particular fund.
Kinnel: That's right. In this case, Brian Quigley, who had been a team member already contributing to this fund, is now going to be the lead manager. But in a case like this, we know there is going to be very little strategy change. The reason you buy one of Vanguard's bond funds--particularly the really conservative Treasury-buying fund--is, one, the lower fees and, two, that they're a very competent, well-run team. And that doesn't really change here with the new manager. This has a huge expense advantage on the competition. They are just buying agency debt and Treasuries, so it's a very cautious fund where there isn't a lot of room for maneuvering. A manager isn't going to put his or her personal stamp on the fund very much. So, in a case like that, we really don't bat an eye. We maintained our Silver rating.
Benz: Index funds, obviously, would be another area where you wouldn't get excited about a manager change, but it sounds like with this Vanguard example, tightly constrained strategy [will ensure there won't be] too much upheaval even if some of the people making the decisions do change.
Kinnel: That's right. On the exact opposite end would be a really dramatically shifting fund or a very focused fund where the manager really has a huge impact on the fund. But in a case like this, there is really a very narrow mandate for the manager.
Benz: T. Rowe Price New America Growth (PRWAX) is another find that had a manager change a few years back--a manager we liked a lot, Joe Milano. A new manager has come aboard and kind of reshaped the fund. And actually, we are upgrading it because we like what we've seen under the new manager.
Kinnel: That's right. When Milano left, we took it from Gold to Neutral, but now we've taken it up to Bronze under Dan Martino, who has a little under a two-year track record there. And while that track record is pretty short, he actually had a very good track record before that at T. Rowe Media & Telecom (PRMTX). But what else we liked is that now, nearly two years in, we understand his style. It's a little more of a pure large-growth strategy than Milano ran. So, a little more of a typical large growth. He's got fewer small caps, fewer cyclicals. So, we have a good manager with a good track record, and now we understand what the strategy is and it seems to be a sound strategy. So far, he has executed well--but, of course, you don't put very much on a nearly two-year track record.
Benz: Right. I noted in this case, Russ, that there had been some tax implications for this manager change, that the fund did make a pretty big capital gains payout at the end of 2014. Let's talk about that interaction between manager change and tax performance from a fund, that there can sometimes be a connection that can be of interest for people who hold the fund in a taxable account.
Kinnel: That's definitely one of the knock-on effects of manager changes as the new manager comes in and wants to remake the portfolio. And so, when that happens, as this one did in a year like 2013 when you already had a nice market rally, you are likely to have an additional level of capital gains. In this case, there was another cause, which was that Milano's departure led to outflows in the fund. And so, again, I think Martino's hand was kind of forced because he had to sell equity to meet those outflows. So, you definitely want to watch for that when you have a manager change. And certainly, if you're considering a fund, you want to be aware of that. Now, at this point, they're probably reset enough to where it shouldn't be a big continuing problem.
Benz: And in any case, it seems that investors, if they are worried about whether these capital gains distributions could follow the manager change, they'd need to consider their own tax position in the fund before pre-emptively trying to dodge that distribution.
Kinnel: That's right. In a case like this fund, had you held it, say, since '08, you would have had a big gain built up yourself. So, you're going to end up paying it one way or the other.
Benz: Russ, thank you so much for being here to discuss ratings changes and the connection with manager changes.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.