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Fund Spy

Great Mutual Funds Go Head to Head

It's Marsico vs. Janus and Fidelity vs. Vanguard!

Should you stay or should you follow the manager? When a manager leaves to start another fund, it's always tough to figure out if you should follow him. After all, a fund isn't just a manager; there are the analysts, traders, and expenses that have a big impact on a fund's success, and they'll usually still be there after the manager leaves.

With that in mind, I looked at a few situations in which managers left to start their own funds. I also looked at indexing's biggest battles, though they don't involve manager departures. Interestingly, you'd have been better off leaving to stay with the manager in the majority of these cases, but my small sampling is hardly scientific. The return figures below are not annualized.

Yacktman vs. Selected American
Winner: Selected American

This is an interesting case because these funds use very different value strategies. Donald Yacktman, who left  Selected American (SLASX) to set up his own fund ( Yacktman Fund (YACKX)) in 1992, runs a concentrated deep-value strategy that has made for more-extreme performance. When value's out of favor, the fund tanks, but in good value years, the fund is outstanding. Selected American under Chris Davis and Ken Feinberg is more willing to pay up a bit for outstanding management, so they have larger growthier stocks than Yacktman.

Although Yacktman made up a lot of ground during the bear market and even the first rebound year of 2003, Selected still has a big lead. From July 1992 through September 2006, Selected is up 425% to Yacktman's 314% and the S&P's 313%. There was an interim manager at Selected, so if you want to just compare Davis/Feinberg with Yacktman, the relevant return starts April 1993. In that case, Selected won 388% to 315% for Yacktman. Of course, I'd say that patient investors did just fine in either fund.

RiverSource Balanced vs. Fidelity Balanced
Winner: Fidelity Balanced

In 2002, a few Fidelity managers and analysts bolted to set up an investment boutique in Boston that was part of American Express' asset management arm. (That arm, Ameriprise, was later spun out.) Robert Ewing and his colleagues' main idea was to simply dig deeper to find important information that would drive a stock at a time when some of Fidelity's efforts were more short-term-oriented.

 RiverSource Balanced  produced a fine return of 27.73% from April 2002 through September 2006. However, Larry Rakers has put up monster returns at  Fidelity Balanced (FBALX), and that fund is up 49% over that stretch. Rakers has made great macro calls on the direction of the stock market and some strong individual stock picks, too. The only worrying thing is that his success has brought a ton of cash.

Harbor International vs. Ivy International
Winner (by knockout): Harbor International
If ever there was a time to keep the manager and leave the fund company, this was it. Manager Hakan Castegren was a brilliant value investor, but that was just the problem (for Ivy, anyway). In spring 2000 all value managers looked like dolts to unsophisticated investors--and those in charge of overseeing Ivy International. So, Ivy kicked Castegren to the curb and hired a growth manager right ... at ... the ... peak. Ouch. Fortunately Castegren also ran another fund, so savvy shareholders could bolt  Ivy International (IVINX) for  Harbor International (HAINX). So how did it turn out? Harbor International has gained 92% since May 2002 while Ivy is up a pathetic 3%. That means the folks at Ivy made a decision that would have cost someone with $100,000 in their fund nearly $90,000!

Ivy, meanwhile, is on its third manager since Castegren.

Marsico Focus vs. Janus Twenty
Winner: Marsico Focus

Tom Marsico's split from Janus got a lot of press, and it is perhaps the most-followed head-to-head matchup. A Denver newspaper even provides regular updates. The key point for this battle was in 2000. Marsico had a more cautious, better-diversified portfolio than Scott Schoelzel did at  Janus Twenty . As a result,  Marsico Focus (MFOCX) lost much less in the bear market than Janus Twenty. Marsico is up 104% versus 81% for Janus Twenty since January 1998. However, both are well ahead of large growth, which is up 38% over that span.

RS Emerging Growth vs. Putnam OTC Emerging Growth
Winner: RS Emerging Growth

When Jim Callinan left Putnam for  RS Emerging Growth (RSEGX) in 1996, Putnam's spin was that the fund's success was all about teams and process. People didn't matter. With hindsight it would appear that Putnam's process and teams were pretty lousy. From July 1996 through September 2006,  Putnam OTC Emerging Growth   is 27% in the red compared with a gain of 151% for the RS fund. That figure for RS looks better than it is, though. Both of these funds got crushed in the bear market, so I doubt many shareholders really got decent performance from RS Emerging.

Although Putnam has improved a bit in some areas, its failure to turn this fund around helps to explain why it is on the auction block. The fund is top-quartile so far in 2006--its first year of above-average performance since 1999.

Fidelity Spartan 500 Index vs. Vanguard 500 Index
Winner (by a small margin): Fidelity Spartan 500

When Fidelity cut its expense ratio on  Fidelity Spartan 500 Index  to 0.10%, some Vanguard defenders argued that  Vanguard 500 Index (VFINX) has trailed its bogy by less than its expenses, so it would be able to make up the 8-basis-point differential. That's a lot to make up, though, and Fidelity's cost advantage has produced a small return advantage. From September 2004 through September 2006, Fidelity Spartan has gained 25.55% to Vanguard 500's 25.37%.

It's worth noting that the right S&P 500 fund depends on how much you have to spend. The Fidelity fund is only available for a minimum of $10,000, so Vanguard is the choice below $10,000. Also, Vanguard's admiral share class, which charges 0.09%, is available for $100,000. Moreover, it wouldn't make sense to switch from Vanguard to Fidelity given the small difference and the tax bill for those switching out of a taxable account.

Etrade S&P 500 Index vs. PIMCO Fundamental Index Plus vs. Fidelity Spartan 500 vs. Vanguard 500 Index
Winner: Fidelity Spartan 500

Lest you think Fidelity and Vanguard are the only options, I've opened up the competition to a couple of other strong contenders. Etrade S&P 500 Index  is undercutting Fidelity with an expense ratio of just 0.09%, and the fundamental indexes crafted by Rob Arnott represent a new challenge.  PIMCO Fundamental Index Plus  tracks his index but then has a pricey overlay in which PIMCO's bond crew aims to add value with fixed-income management.

It's way too early to say who will win the long-term race, but Fidelity is leading from July 2005 through the present: Fidelity Spartan 500 14.68%, Etrade 14.66%, Vanguard 14.59%, and PIMCO 13.62%. In short, as is usually the case with index funds, expenses explain the difference. I'm not sure why Etrade hasn't matched Fidelity's returns, though.

Poll Results
Here's how you voted on last week's question.

Which word are football announcers least likely to use correctly?

26% - Notorious

57% - Ironically

17% - Verbal

If you're a football announcer I urge you to go to Merriam-Webster and look up the definitions of these words.

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