Do the Morningstar Fund Manager of the Year Awards Have Staying Power?

In 2011, the mutual fund managers recently decorated by Morningstar collectively went kerplop. True, the 2010 Fund Managers of the Year at  Sequoia (SEQUX) were terrific. But Brent Lynn at  Janus Overseas (JAOSX) and Michael Hasenstab at Templeton Global Bond (TPINX) got walloped, finishing near the bottom of their categories. And the Managers of the Decade, named in early 2010, followed up a good 2010 with a year to forget. In 2011, Bruce Berkowitz plunged and Bill Gross suffered his only bad outing in ... well, forever. (The third Manager of the Decade, David Herro of  Oakmark International (OAKIX), was about average.)

This predictably has led to jokes about the Morningstar Fund Manager of the Year award being a cousin of the (alleged) Sports Illustrated cover jinx. I'm not going to address that argument, partly because I would have made those same jokes if I were a journalist covering Morningstar, and mostly because there's nothing to address. The Fund Manager of the Year award has been around two decades now, and there has been no pattern of managers heading sharply south--or north--in the year following the award.

However, the comments did surface a weightier issue: How have Morningstar's Fund Managers of the Year fared? Those in charge of selecting Morningstar's Fund Managers of the Year (not me, although I do participate in a small way) will tell you emphatically that a Manager of the Year award is not predictive. It merely salutes past success. Alright, fine. Duly noted. But that's not how I look at the award--nor, I suspect, how you look at it. What's the point of identifying managers who demonstrated past excellence if they can't be excellent in the future, too?

So, in that spirit, as well as in the spirit of learning from history, here are the after-award results for the Manager of the Year winners. I examined the 10 years following the year for which the manager received the award, comparing a fund's Morningstar Risk-Adjusted Return, or MRAR (that is, the performance adjusted for the risk assumed by the fund--the backbone of the Morningstar Rating for funds, or star rating, calculation) against the average Morningstar Risk-Adjusted Return for that fund's category. If the manager received the award more than three years ago but less than 10 years ago, then I used the time period that was available. Managers who won for 2009, 2010, or 2011 are not evaluated because fewer than three years have elapsed.

I summarized the results for each fund according to the following scoring system. For domestic-stock and international-stock funds, beating the category MRAR average by at least 400 basis points per year gives Morningstar's award selectors a top score of 5. Beating it by 100 to 400 points earns a 4. Finishing within 100 basis points in either direction is a 3. Falling between 100 and 400 basis points below the average receives a 2. Finally, being more than 400 basis points behind the category average gets a score of 1.

I've also provided a comparison of the award managers' collective MRAR versus the category's collective MRAR for each of the three award groups (that is, Domestic Stock, International Stock, and Fixed Income). This is a bit unfair to the managers in that their funds lived to tell their tales, while the category averages are not adjusted for survivorship bias. But this is a ballpark study anyway; the idea is not to sweat blood coming up with the perfect measurement system but rather to get a fair and reasonably accurate picture.

A few ground rules. Some winning managers ran multiple funds. In those cases, I selected the bigger, more mainstream fund to evaluate. Next, many managers retired or moved before the decade expired. Unless they left very early in their tenures, I evaluated the funds as if the managers had stayed the whole time--a reasonable view given that typically they handed over their funds to handpicked proteges.

 

Finally, some funds required an editorial call. For example, Jeff Vinik left  Fidelity Magellan (FMAGX) shortly after being selected as Morningstar's 1993 Fund Manager of the Year, and he became a highly successful hedge fund manager. Success? Flop? I decided neither and gave that pick a 3. Jim Callinan immediately hit the headwind of the tech-stock crisis after being named the 1999 Domestic-Stock Fund Manager of the Year for RS Emerging Growth, posted big losses on a new fund that he was assigned, and was quickly out the door. That's a 1 in my book.

The results for the three award groups were, in order: meh, good, and wow--do you pick NFL games?  

Domestic Equity
The Domestic-Stock awards earn the meh label. The good news is that only three of the 19 awards didn't pan out. The other 16 managers performed either in line with the category averages or significantly better. Unfortunately, the three that flopped, really flopped. Bill Miller's  Legg Mason Value (LMVTX) became the industry's biggest disappointment in the mid- and late-Oughts; as previously mentioned, Jim Callinan was victimized by the tech-stock collapse; and  Longleaf Partners (LLPFX) got whacked in two of its next five years. So, the overall score for Domestic Stock is a middling 3.1, with the funds barely beating out the category averages.

Year Manager Fund Score 1990 Marty Whitman Equity Strategies 4 1991 Don Yacktman Selected American 3 1992 Bill Dutton Skyline Special Equities 3 1993 Jeff Vinik Fidelity Magellan 3 1994 Bob Rodriquez FPA Capital 3 1995 Jack LaPorte T. Rowe Price New Horizons 3 1996 Shelby Davis Selected American 4 1997 Mario Gabelli Gabelli Asset 4 1998 Bill Miller Legg Mason Value 1 1999 Jim Callinan RS Small Cap Growth 1 2000 Jim Gipson Clipper 3 2001 Bill Nygren Oakmark Select 3 2002 Joel Tillinghast Fidelity Low-Priced Stock 4 2003 Howard Schow Vanguard PRIMECAP 4 2004 Brian Berghuis T. Rowe Price Mid-Cap Grth 4 2005 Chris/Shelby Davis Selected American 3 2006 Mason Hawkins Longleaf Partners 1 2007 Will Danoff Fidelity Contrafund 4 2008 Charlie Dreifus Royce Special Equity 3   Average Score   3.1             Categories Funds   Average Annual Performance 0.54 0.62

 

My take on the Domestic-Stock awards is to beware of funds posting high returns because of financials and/or technology stocks. In addition to the examples of Miller, Callinan, and the Longleaf team, who were all spanked when their sectors moved against them, Berkowitz owed his 2011 woes to a surfeit of financials. Those high-risk, highly focused managers concern me. On the other hand, when the team selected managers who practice risk management, it fared quite well.

Fixed Income
The winning Fixed-Income managers have been good. Their funds' MRARs are collectively 50 basis points better than the category MRARs, which probably means a margin of 80 basis points or so when survivorship bias is considered. What's more, the picks are improving. After mixed early results, the Fixed-Income selections have been almost uniformly excellent over the past decade. Every choice has been a 4 or a 5 except for a repeat award given to Bob Rodriquez of  FPA Capital . The recent Fixed-Income award managers have delivered sustainable, repeatable performance. 

Year Manager Fund Score 1994 Bob Rodriquez FPA New Income 3 1995 Dan Fuss Loomis Sayles Bond 5 1996 Joe Deane Shearson Managed Munis 3 1997 David Baldt Morgan Grenfell Fixed Inc 2 1998 Bill Gross PIMCO Total Return 5 1999 Jerry Paul Invesco High Yield 1 2000 Bill Gross PIMCO Total Return 5 2001 Bob Rodriquez FPA New Income 2 2002 Team Dodge & Cox Income 4 2003 Team Fidelity Municipal Income 4 2004 Stephen Walsh Western Asset Core Bond 4 2005 Landmann & Rivelle MetWest Total Return Bond 5 2006 Jeff Gundlach TCW Total Return Bond 5 2007 Bill Gross Harbor Bond 4 2008 Bob Rodriquez FPA New Income 1   Average   3.5             Categories Funds   Average Annual Performance 2.39 2.94

 

My thought for the Morningstar team is to quit picking Bob Rodriguez! No, that's not it, not really. Over the past two decades  FPA New Income (FPNIX) has performed very well indeed. However, its gains come in waves. The fund will enjoy two or three truly outstanding years, then subside for a while and maybe post an outright weak year (on a relative basis) before soaring again. The timing of Morningstar's Fund Manager of the Year awards inevitably catches the fund coming off its peak, and it may require more than a decade for the fund to hit a new peak. So, the fund is fine, it's just a tough fund to own, at least as relative performance is considered. In light of that, perhaps the team might have been rash to pick Rodriguez three times.

International Equity
Finally, the Morningstar team selecting the International-Stock winners should open a hotline on NFL games. Of the 13 Fund Manager of the Year selections for International Stocks, 12 ran funds that had strong future results of 4 or 5. The team's one "failure" is a fund that has beaten its category average since it was selected (albeit by only a modest margin, which is why it scores a 3 rather than a 4). Some failure. Overall, the funds run by the winning International-Stock managers have outMRARed their category averages by nearly 300 basis points per year.

Year Manager Fund Score 1996 Hakan Castegren Harbor International 4 1997 Helen Young Hayes Janus Overseas 5 1998 Mark Yockey Artisan International 5 1999 Team EuroPacific Growth 4 2000 Browne et al. Tweedy, Browne Global Value 4 2001 Jean-Marie Eveillard First Eagle Global 5 2002 Team Artio International Equity 4 2003 William Fries Thornburg Intl Value 4 2004 Team Dodge & Cox Intl Stock 3 2005 Rob Lyon & Team Mainstay ICAP International 4 2006 David Herro Oakmark International 4 2007 Hakan Castegren Harbor International 4 2008 Samra/O'Keefe Artisan International Value 4   Average   4.2             Categories Funds   Average Annual Performance -3.41 -0.56

 

No advice to offer here except don't change what you are doing, people. 

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