Morningstar Advisor - August/September 2013 - (Page 21)

Investment Briefs Manager Change Data Shows Why People Are Crucial to Ratings by Russel Kinnel Earlier this year, Scott Kolar left Goldman Sachs Growth Opportunities GGOAX. His comanagers, Steven Barry and Jeffrey Rabinowitz, remain at the fund. Will they be there five years from now? Maybe, but I wouldn’t bet on it. Kolar was named comanager in 2011 when Warren Fisher and David Shell left. Fisher had been named comanager in 2009 and Shell in 1999. Before they left, Herb Ehlers, Ernest Segundo Jr., and Ken Berents left in 2005, Mark Shattan left in 2003, and George Adler and Robert Collins left in 2001. Occasionally a spate of manager instability is followed by a long period of stability or vice versa, but more often it isn’t. The strongest cultures are places where analysts and managers want to stay for their entire careers. On the other hand, there are firms where everyone has his or her eye on the exit. a modest increase from 1.05 future departures to 1.37. At two past departures, it surged to 2.58 departures on average. The rate dipped a bit to 2.06 departures for funds with three past departures and then rose again to 3.46 departures for those that shed more than three managers in the earlier period. The results were pretty similar in other groups. Balanced funds were particularly dramatic as there was a swing from 1.2 future departures at the low end to 5.4 departures for balanced funds that had more than three departures during the prior period. The trend worked for taxable-bond funds, too, though the disparity was smaller—1.1 to 2.6 from top to bottom. Let’s look at the results for all funds. In the 2002 test, funds with no change in the prior five years experienced 1.1 departures on average in the next five years. That was followed by 1.53 for one departure, 1.83 for two departures, 2.34 for three departures, and 3.00 for more than three departures. For the 2007 test, we saw 1.04 departures on average for the no-departures group, then 1.56 departures, 2.03 departures, and 3.34 departures for the last group. What About Past Returns? I set out to see just how predictable manager changes are. I grouped funds by the number of manager departures in the five years prior to 2002 and 2007, then looked at how many departures the funds suffered in the ensuing five years. I created five groups: no departures, one departure, two departures, three departures, and more than three departures. I looked at it by category grouping and overall. Change Begets Change The data shows that, sure enough, stability trends continue. For example, among U.S. equity funds grouped by their departures from 2002 to 2007, funds that had no departures in the trailing five years were much less likely to lose a manager than funds that had lost three managers in the prior five years. Going from no past departures to one led to I wondered whether funds with bad performance were even more likely to make changes than funds with past manager departures. The answer—yes, there is a slight link between performance and departures. It is not nearly as strong as past manager departures, though. For 2007, funds in the top-performing quartile saw 1.4 manager departures on average in the ensuing five years. Funds in the second quartile saw 1.73 departures on average, while third-quartile funds saw 1.94 departures on average. Bottom-quartile funds saw 2.08 manager departures on average. That gives us a difference of 0.68 manager departures on average compared with 1.81 manager departures from the top to bottom groups, based on past manager departures. So, manager departures were nearly three times more predictive of future manager changes. This suggests to me that I want to steer clear of most funds with more than a couple of departures in recent years. If a fund has had a number of manager changes, be very skeptical about claims that everything is ducky now. It just doesn’t happen often. Russel Kinnel is Morningstar’s director of mutual fund research. Are Target-Date Funds Aging Well? by Josh Charlson Target-date series are earning their keep in 401(k) plans. A recent Morningstar study found these retirement investments are getting cheaper, and post-2008 returns have been strong, reflecting broad market trends. Those trends are consistent with a maturing segment of the fund industry. Targetdate series have become fixtures in Americans’ defined-contribution plans, with assets crossing the $500 billion mark in the first quarter of 2013. The industry’s market leaders—Vanguard, Fidelity, and T. Rowe Price—still control about three fourths of the industry’s assets, despite impressive growth from some of the industry’s smaller players. More new cash poured into passively managed series than actively managed series, reflecting a move in retirement savings toward indexed investments. As assets have flowed into target-date funds, fees have declined. Target-date series’ asset-weighted average expenses clocked in at 0.91% at year-end 2012, down from 0.99% the year prior. Part of that change was likely due to the fact that some investors may have MorningstarAdvisor.com 21 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2013

Morningstar Advisor - August/September 2013
Contents
Contributors
Letter From the Editor
Under Pressure
Has Your View of Bonds Recently Changed?
The Simple Life Cuts a Path to Prosperity
How Extended Is Your Bond Fund?
A Bond Contrarian Scours the Globe for Value
Investments á la Carte
Investment Briefs
Bond Market Behemoths
Shopping in the Digital Age
Shopping in the Digital Age
Diverse Crowd
Motor City Meltdown
Bond Convergence
Corporates Are Fairly Valued, but Opportunities Will Arise
A Legend Still Pines for the Good Fight
Greener Pastures
Forecasting Market Bubbles and Crashes
Forecasting Market Bubbles and Crashes
Home-Court Advantage
Overcoming Technophobia
These Funds Are Counting on Undervalued Sectors
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
What Price Advice?

Morningstar Advisor - August/September 2013