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Fund Spy

4 Funds Where Key-Person Risk Looms Large

The departure of these individuals would be cause for concern.

 

 
  

 

Certain strategies are structured in a way that creates key-person risk, such as those that rely heavily on one portfolio manager’s decision-making abilities and investment prowess. Strategies that fail to adequately plan for a prominent manager’s departure invite future challenges for the strategy and its investors. Replacing an experienced veteran that has demonstrated skill over long stretches is not an easy feat. Here are four funds that lean heavily on one portfolio manager.

Invesco Developing Markets (ODMAX) relies on lone manager Justin Leverenz’s knowledge and experience in the emerging-markets space. Leverenz has steered this specific strategy since May 2007 and boasts more than 20 years of investment experience. He plies an unconventional, growth-oriented approach, which has resulted in strong performance over longer stretches. Over the 10-year period ended May 2021, the fund’s A share class’ 5.6% annualized return easily bests the diversified emerging-markets Morningstar Category median and its MSCI Emerging Markets Index benchmark’s matching 4.1% return. Leverenz’s distinguished investment approach, coupled with the fact that he makes all buy, sell, and weighting decisions, contributes to the key-person risk here. However, while he remains at the helm, the strategy’s A share class continues to earn a Morningstar Analyst Rating of Bronze.

The considerable talent and experience of Lewis Kaufman, Bronze-rated Artisan Developing World’s (ARTYX) sole manager, is this three-person team’s primary strength. Kaufman has led this strategy since its June 2015 inception and boasts 21 years of investment industry experience. Prior to joining Artisan in 2015, he spent roughly five years successfully running a diversified emerging-markets strategy for Thornburg Investment Management. He carried over much of the growth-oriented process employed during that stint to this strategy, which has enjoyed similar success. From July 2015 (its first full month) through May 2021, the strategy’s 19.6% annualized return walloped the MSCI Emerging Markets Growth Index by 8 percentage points and topped all diversified emerging-markets Morningstar Category rivals. This success rests heavily on Kaufman’s shoulders, as two 2018 associate portfolio manager departures exacerbated key-person risk.

The skill of portfolio manager Amy Zhang is a key driver of Alger Small Cap Focus’ (AOFAX) Silver Morningstar Analyst Rating. Zhang spent nearly 13 years refining her craft as a comanager of Gold-rated Brown Capital Management Small Company (BCSIX) before departing Brown to take the reins here in February 2015. She plies a unique approach that has resulted in dominant performance since she began managing this strategy. From February 2015 through May 2021, the A share class’ 18.7% annualized return handily beat the typical rival’s 15.2% gain. To be sure, the strategy’s small team (six analysts support Zhang) relies on the manager’s continued presence to maintain its success.

At Silver-rated Fidelity Low-Priced Stock (FLPSX), Joel Tillinghast is the ballast. He has led the strategy with a cool head through myriad market environments during his more than 30-year tenure at its helm. From January 1990 (the strategy’s first full month) through May 2021, the strategy’s 13.8% annualized return topped all peers and outpaced the Russell Mid Cap Value Index benchmark by 220 basis points. Over the same stretch, the strategy also topped competitors on a risk-adjusted basis, as measured by Sharpe ratio. To achieve this feat, Tillinghast and his five comanagers have successfully hunted for sturdy, underpriced businesses that have little debt, strong profitability, a defendable market niche, and capable leadership. The strategy is in good hands with Tillinghast still in the fold, but its reliance on his presence makes its future uncertain when he steps down.

R.J. D'Ancona does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.