Changes for the Better

Changes in fund management can happen for any number of reasons. A longtime manager may retire, or the fund company might want someone who can execute a new strategy. Then there are instances when new management is brought in simply because a fund is underperforming and the fund company wants to shake things up. For investors in the fund, this can be welcome news, especially if the fund has been floundering for years. But any change in fund management bears watching, and new blood doesn't necessarily mean better performance.

In last week's Five-Star Investor, we looked at funds that have undergone management changes in the past few years that haven't panned out. We screened on funds with good long-term performance but subpar near-term returns that roughly coincide with new managers being brought on board. This week we flip the script and look at funds whose recent management changes coincide with upturns in performance.

As with last week's screen, this one calls for a caveat. Just because a manager's brief tenure shows a marked improvement in the fund's performance doesn't necessarily mean he or she deserves all the credit. A new manager might make few alterations to a fund's portfolio and still reap the benefits of changing market conditions that provide a boost. More broadly, a positive turn in overall market direction, such as last year's 16% gain for the S&P 500, may help a newer manager reverse a negative performance trend. In some cases, however, new management undoubtedly deserves credit for injecting life into a moribund fund. A screen can identify funds that meet our criteria of portfolios that have improved under new managers, but only by doing additional research can one determine who should receive the credit. 

Using Morningstar's  Premium Fund Screener tool we searched for equity funds with below-category-average performance during the trailing 10 years but top-quartile annualized performance during the trailing three years and with management changes during that latter time period. We excluded funds with management changes within the past 12 months to ensure that only funds whose managers had overseen a substantial portion of the past three-year period were represented. We also screened out institutional and enhanced index funds and applied the distinct portfolio screen to eliminate duplicate share classes. Premium users can click  here to see the full screen. Below are some of the names that passed.

 Fidelity Growth & Income (FGRIX)      
Category: Large Blend | 3-Year Percentile Rank: 12     
This fund's management change--and shift to a more dividend-focused strategy--in early 2011 was well-timed. With yield-starved investors seeking income-producing stocks, the fund managed to beat its category average by 2.7 points that year and by 4.1 points last year. Manager Matthew Fruhan, who took the reins in February 2011, favors stable companies he can buy at a temporary discount and cyclical-growth stocks. The fund holds 20% of its portfolio in financials, which is double the category average, with industrials (15%) another area of emphasis. The fund falls in the bottom 3% of the large-blend category for the trailing five-,10-, and 15-year time periods, but the top quintile for the trailing one- and three-year periods. The fund's 0.71% expense ratio is low for the large-cap no-load group.

Vanguard U.S. Value       
Category: Large Value | 3-Year Percentile Rank: 8      
Vanguard's Quantitative Equity Group took sole control of this quant fund in October 2010 after axing subadvisor AXA Rosenberg. The team uses a model based on company valuation, growth, momentum, quality, and management characteristics and assembles a portfolio with sector weightings in line with the Russell 3000 Value Index. Although the fund's 10-year annualized record is slightly subpar (22 basis points worse than the category average), its one- and three-year returns are 4.6 and 2.8 points better, respectively. The fund's low 0.29% expense ratio certainly doesn't hurt performance.

Performance data as of Jan. 14; Fidelity Growth & Income portfolio data as of Nov. 30.