Manager Changes That Show Its Time for a Fresh Look

Christine Benz: Hi, I'm Christine Benz from Morningstar. Investors often assume that a manager change is automatically a red flag, but that's not always the case. Joining me to discuss some funds that have actually seen upgrades to their Analyst Ratings since experiencing manager changes is Russ Kinnel. He's Morningstar's director of manager research (and editor of Morningstar FundInvestor). Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: In your latest issue of Morningstar FundInvestor, you wrote about some manager changes--some for the better, some for the worse. We're going to focus on the ones that were actually improvements at various funds. Let's start with a biggie, or certainly a fund that was a biggie when you and I were manager research analysts, Fidelity Magellan. It experienced a manager change, and we've subsequently upgraded the fund.

Kinnel: That's right. We raised the fund to Bronze with Sammy Simnegar taking over the fund. It was the first time Magellan's ever been rated Bronze. The thing we like here is that Sammy Simnegar has a good record at emerging markets and an international fund, and we think he'll be able to largely apply that approach to Magellan, so in our view it's good enough.

Obviously Magellan's history, post Peter Lynch or maybe post Jeff Vinik, is pretty lousy. It's been pretty disappointing, sometimes dramatically so, sometimes just sort of gradually underperforming. But really you have to kind of take a reset view on it and recognize what if it wasn't named "Magellan." This is a successful manager with a good strategy. Now it's down to about $19 billion in assets. So, whereas assets used to be a huge handicap for a single manager to run, now it's not that big a deal for running a large-growth strategy. Simnegar's got kind of an unusual strategy where he has a bunch of modest overweights versus a benchmark, but somehow that's worked well for him and so we think that can work here.

Benz: When you say, Russ, that it is its first time at a Bronze rating, it had not been a medalist before, correct?

Kinnel: That's right. So we've been doing medal ratings since 2011, and it's been stuck on Neutral and not really tempting to move it up since then. So, and really, like I said, really you have to go back to the '90s to find a time when it actually had some appeal.

Benz: Let's look at another one. This is Alger Small Cap Focus. Amy Zhang running the fund here. And let's talk about why you and the team saw her arrival at this fund as sort of immediately good news for shareholders.

Kinnel: She came over from Brown Capital Small Company Management, and that fund has been very highly rated for us. It's currently Gold, a great record of a small cap growth strategy based out of Baltimore. They've just done a really good job, and she was part of that team. So when she came over to Alger, about a year after she came over, we put a Bronze rating on it, and now recently we've raised it to Silver. So a really good, fairly aggressive growth strategy but one that keeps in mind earnings, sustainability of those earnings, and so we've really warmed up on the fund.

Benz: This one is definitely not for Sunday drivers. This is a very aggressive portfolio, correct?

Kinnel: That's right. It's an aggressive fund. When she took over, we expected she would run the strategy like Brown had been run, but our question was really--she was a team member, so we don't know exactly how good she would be, how good would execution be, because you never know with the team exactly how much credit any individual manager should get. And over time she clearly proved to be a very good manager, so that's what got it to Silver--and in this case, clearly an upgrade when they brought her in.

Benz: Another fund that saw an upgrade and had a manager change is Artisan International Small-Mid cap. Let's talk about that one. A manager coming over from Oppenheimer Funds.

Kinnel: Yeah, you talked about aggressive. This fund's even more aggressive under Rezo Kanovich. He came over from Oppenheimer with a very strong track record. Artisan brought him in. The name was changed from "small cap" to "small-mid," so obviously a move up in market cap a bit but also moving well out on our growth style box--so very aggressive growth strategy. Tremendous return potential, but we rate it Bronze, not higher, in part because when you risk adjust it's not quite as attractive. This is clearly a pretty aggressive strategy but one that he's done very well at Oppenheimer and so far has done well at Artisan.

Benz: Kind of a broader question for you, Russ, for investors who are navigating manager changes, if they have actively managed mutual funds: Even if a manager has a good track record somewhere else, how do you and the team get confidence that they'll do a good job at the new fund? Because as you say, you have questions maybe about the team supporting them, about the resources they have. How should investors try to get their arms around those questions?

Kinnel: There's a lot of layers to that, but certainly one question is: How much help did they have, how much could they take ownership of that past record, and what's their new situation? You know, for instance, in the case of Kanovich, Oppenheimer tends to have very small teams, and so the fact that he was on a new small team and even brought over an analyst he worked with at Oppenheimer gave us confidence, so it wasn't like he was part of a huge team. So I think you want to look at that. You want to look at is the strategy different. You want to look at asset sizes. In some of the cases we mentioned, the managers were actually going to a smaller fund, so that's a positive, especially with a smaller mid-cap strategy where assets size can be a liability.

Benz: Russ, always great to get your insights. Thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz from Morningstar.