Funds Facing Succession Challenges

This article was originally published in the January 2017 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

Investors benefit from using portfolio managers who have witnessed and successfully managed assets through multiple market cycles. The flip side to that hard-won experience, though, is that those same managers may be at later stages of their careers and looking to taper off involvement with their funds. Here are a few funds that have benefited from decades-long manager continuity but that are also facing succession questions; some of these managers are well past standard retirement age (most have no plans to retire in the near future). In some cases, firms have been prepping for the inevitable by building out deep benches. In others, though, the next leader has yet to emerge. Below, we've ordered the funds from most to least risky when it comes to succession and risk.

Gabelli Small Cap Growth GABSX and Gabelli ABC GADVX

Mario Gabelli's eponymous firm turned 40 in 2016, while Gabelli himself turned 74. Succession is a huge issue on a number of the firm's funds: Gabelli is listed as the sole portfolio manager on 10 of his firm's open- and closed-end funds, and he's a listed portfolio manager on 20 funds in total. The two Gabelli funds with Morningstar Analyst Ratings--Gabelli Small Cap Growth and market-neutral strategy Gabelli ABC, both Neutral--face notable key-man risk. As the lone manager on Small Cap Growth, Gabelli has used his relatively staid, valuation-conscious approach to amass an impressive track record that spans more than 25 years. Despite the mid-2015 promotion of two investment personnel to co-CIOs of the firm's value strategies, Gabelli's departure would leave a notable hole at Small Cap Growth. That's also true of Gabelli ABC, where Gabelli relies heavily on intuition rather than a well-defined investment process to manage the fund. While Gabelli's approach at ABC has benefited from his deep experience, it's not a process that encourages autonomy among his merger-arbitrage analyst team.

Baron Growth BGRFX and Baron Partners BPTRX

When Ron Baron founded Baron Capital in 1982, he performed much of the research himself; early and continued investment success since then has allowed him to build his namesake firm into a team that includes 10 portfolio managers and 25 analysts. With that deep bench, 73-year-old Baron has indicated who will follow him at a number of funds. For the firm's $5.7 billion flagship fund, Bronze-rated Baron Growth, that includes analyst and assistant portfolio manager Neal Rosenberg. On the $1.6 billion, Neutral-rated Baron Partners, though, a successor has yet to be named.

Royce Pennsylvania Mutual PENNX

The 76-year-old Chuck Royce has led Neutral-rated, small-blend Pennsylvania Mutual since 1972, producing a long-term performance record that tops that of the Russell 2000 Index (which was only launched in 1978). Succession planning here is relatively clear, with comanagers Jay Kaplan and Lauren Romeo added to the roster in 2003 and 2006, respectively. Still, each manager independently manages sleeves of the portfolio, with Royce in charge of approximately 60% of assets. Royce's outsize share of the portfolio plus his history with the fund give him the lion's share of credit when it comes to its strong long-term record. He has already stepped down as CEO at Royce & Associates.

Sound Shore SSHFX

Portfolio managers Harry Burn and Gibbs Kane (72 and 69 years old, respectively) have led Silver-rated large-value fund Sound Shore since its 1985 inception; they also co-founded advisor Sound Shore Management in 1978. Succession is less of an issue here, as longtime analyst John DeGulis became a comanager on the fund in 2003; the next generation of leadership has already had a long runway of preparation. Even the firm's analysts are relatively long-tenured, having joined the firm between 2003 and 2008, and the team generally sees little turnover of its investment personnel.