The Devil, the Details, and Fund Manager Changes

Unplanned fund manager departures can really mess with your portfolio plans.

It can be exasperating for fund investors. You spend a lot of time looking for a manager with solid experience, a repeatable process, and staying power, only to see him or an important member of his team up and leave long before you've reached the limits of your investment horizon. What do you do? Should you stay or should you go when your fund manager hits the road? It's one of the most common questions Morningstar fund analysts field.

Unfortunately there are no easy answers. Dumping a fund at the first sign of management or management team change is short-sighted--and so is swallowing the usual company line that all is well; that the transition was in the works for months and the switch is all part of the long-term plan. Evaluating fund manager changes requires looking at the details, and the specifics often can make a worrisome change tolerable and a tolerable change worrisome, as a few recent examples show.

Don't Get Heired-Out 
Jaws dropped (at least mine did) when longtime  Loomis Sayles Bond (LSBRX) comanager Kathleen Gaffney left in late 2012 for Eaton Vance after nearly three decades with the firm. She had been comanager to fixed-income investing legend Dan Fuss since 1997 and was considered by many to be his heir apparent. It was a big loss, but the fund kept its Morningstar Analyst Rating of Gold because capable veteran comanagers Elaine Stokes and Matt Eagan, as well as a deep analyst team with broad capabilities, remained. Indeed, the fund's entire management team won Morningstar's Fixed-Income Manager of the Year award in 2009. (Fuss won it in 1995.) Gaffney's resignation was a loss, but a survivable one.

Watchful Waiting 
By the end of this year,  FPA Capital will make the second major adjustment to its management team since 2010. Rikard Ekstrand took over this fund with Dennis Bryan in 2010 after longtime leader Bob Rodriguez stepped aside for a sabbatical, but Ekstrand will leave the fund and firm by Dec. 31, 2013, to return home to Sweden due to family matters. Ekstrand, who joined FPA in 1999, had been listed as a manager on the fund with Bryan and Rodriguez since 2007 and is a key member of this team who contributed many of the fund's successful energy picks over the years. While his impending departure is not unexpected--FPA announced it seven months in advance--it's not a positive.

Bryan, who has been with FPA for 20 years, should be able to hold the ship together though. He collaborated closely with Ekstrand on many of the fund's roughly 30 holdings and is steeped in the fund's deep value style. Recently promoted associate manager Arik Ahitov, who joined the firm in 2010, and another analyst also remain; and Rodriguez, though not involved in the day-to-day management of the fund anymore, is still around to offer risk control guidance. Like Gaffney's leave-taking from Loomis, Ekstrand's retirement is a loss. The fund's concentrated, low-turnover portfolio and Ekstrand and Bryan's history of close collaboration should help Bryan to keep executing the fund's approach.

A New Burden of Proof 
 T. Rowe Price New America Growth's (PRWAX) surprise change on May 10 has more serious ramifications. It's getting a new manager who has had some success running a more narrowly focused fund, but who will use a somewhat different approach than his predecessor. Former manager Joe Milano built a great 10-year record at New America Growth with a style that was diversified, yet opinionated. He did much of his own research in crafting a defensive-minded portfolio that included a lot of small- and mid-cap stocks and a relatively big helping of industrial and commodity-related companies.

T. Rowe is known for being built to withstand manager departures. Investment advisory committees support each fund and the firm usually takes several months or years to transition funds from one manager to another. Milano's departure, however, seemed to take them off guard. His successor,  T. Rowe Price Media & Telecommunications (PRMTX) manager Dan Martino, knew a diversified stock fund was probably in his future at T. Rowe, but he had not been trained or mentored to eventually take over this specific one. And while Martino has a good, albeit short, record as a sector fund manager, he'll do things differently than Milano. Like all T. Rowe managers he pays close attention to valuations and business franchise strength, but he's likely to be less defensive and more apt to work closely with T. Rowe's tribe of more than 100 analysts. That may turn out just fine, but the change is significant enough to merit dropping the fund's Gold Analyst Rating to Neutral until Martino can prove he's as good a diversified growth fund manager as he was a sector fund manager.

For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.