A Mutual Fund Merry-Go-Round No One Should Have to Ride

Mutual fund investors typically would like their portfolio managers to stay in place for decades. The manager is one reason they bought the fund, after all. So, a change generally isn't welcome. But most fund investors will accept an occasional transfer of leadership, especially if the new manager already had spent a good amount of time on the team and the overall strategy remains in place.

More jarring are the cases where the new manager has no connection with the previous regime and upends the fund's approach. At times, shareholders can accept this, too, if the prior scheme wasn't working and the new leader has a proven record.

But when managers and strategies change with disturbing frequency, there's cause for alarm. That's the case at  DWS International (SCINX), which has undergone an astonishing amount of disruption over the past 10 years.

From Stability to Something Else
Until 2002, the fund then known as Scudder International had a long and impressive history, though its growth tilt did cause problems in the tech-led market crash that began in 2000. Over the years, it hadn't changed managers often and its strategy stayed intact.

That changed when Deutsche Bank bought Zurich Scudder, the fund's advisor, in early 2002. The fund's longtime lead manager soon departed, and the new team installed by Deutsche was a mishmash. The lead manager and one comanager came from the firm's London office; another comanager came from its separately run New York group; yet another comanager was a holdover from Scudder. All grouped together in London, they installed a new strategy that downplayed the fund's previous theme-based approach and toned down its growth tilt.

A couple of years later, the fund was allowed to own a few more emerging-markets stocks than it previously had been. That wasn't the only difference. One by one, the comanagers from the initial Deutsche team left the group.

Then in 2005 the lead manager, Alex Tedder, departed. He was replaced by Matthias Knerr, who'd been an analyst on the fund before being promoted to comanager. Knerr tweaked the strategy, shifting the fund away from its almost-exclusive focus on the biggest stocks. He was also more willing to differentiate the portfolio from the weightings in the fund's benchmark, the MSCI EAFE Index.

The Next Phase--and the Next
The Knerr era was relatively successful for shareholders. His approach landed the fund in the foreign large-blend category's top half in both 2006 and 2007. It also outperformed in a difficult environment during the first seven months of 2008.

And then it was over. In August 2008, after three years as lead manager, Knerr left--along with a comanager and two analysts. The result was another major restructuring. Management was shifted to the Frankfurt office of Deutsche, where the fund was placed under the direction of Michael Sieghart. He made some adjustments to the strategy. He worked with a team of analysts in Frankfurt. He lasted 14 months.

In October 2009, Nikolaus Poehlmann became the fund's fifth lead manager since 2001. His team included several comanagers in the Frankfurt office. Under this group's direction, the fund sank to the 98th percentile of the foreign large-blend group in 2010. In that year, the fund gained only 2.5% while the category average rose more than 10%.

A few months later, Poehlmann was out.

If We Can't Pick Stocks, Maybe Someone Else Can
In April 2011, yet another management team entered the scene with a drastic change of approach. New managers Thomas Voecking and Jason Inzer have tracked the buy and sell calls of thousands of analysts working for several hundred brokerage houses and other firms. They've identified the most successful of them and now rely on those analysts' decisions to select stocks. The position sizes of the individual holdings "are derived using a proprietary stock level signalling process combined with an optimised portfolio construction process," according to DWS (as Deutsche's fund group is known).

DWS says the fund's current managers have already been using this uncommon approach on offerings available outside the United States, with some success. But even on those funds, this strategy has been in place for less than two years.

Alternative Strategies
Given that this fund has a history of instability in the management ranks, an unproven current strategy, and a 10-year record that sits in the bottom quartile of its category, you might assume that all its shareholders had long since departed, leaving it with a minuscule asset base. Not so. At the end of June 2011, DWS International had about $985 million in its coffers.

After such a discouraging decade, why would this fund still have nearly a billion dollars under management? Inertia appears to be a reason. About $800 million of this total is in the fund's S shares. These are the "legacy" shares left over from the old Scudder days, when the fund was a pure no-load offering. True, this share class is just half the size it was in late 2002, but its current bulk remains formidable. Have many of this fund's shareholders simply hung on without paying much attention? Shouldn't they consider other options? (DWS added front-load and other share classes long ago, but these don't have much money in them--though even the $130 million or so in the A shares is surprisingly large given the fund's unimpressive credentials.)

Why so many people own this fund is just one pertinent question. Another is: Why haven't the directors replaced DWS as the advisor of this troubled entity? The answer, most likely, is that directors typically don't think that changing advisors is truly their role. In fact, such a move almost never takes place. But it does happen from time to time. And by the fourth or fifth manager change, shouldn't that step have been taken here? 

Mutual fund analyst Kathryn Young provided research assistance for this column.