Recently Bob C (thanks for all your great comments over the years) was quoted as saying to his clients:
"We are NOT buying FUNDS. We are HIRING MANAGERS!"With this mandate in mind, I wanted to gather some thoughts, reccommendations, and comments from others on this seemingly important yet often forgotten component of fund selection.
A quick dip into the electronic abyss with my e-seine net captured these quotes:
"According to an analysis prepared for U.S. News by Morningstar, 665 funds have swapped out at least one manager so far this year. If the trend continues at its current rate, that number could swell to more than 1,000 by the close of the year. By comparison, only 783 funds experienced such a change in 2012. In 2011, that number was 747, and in 2010, it was 626.
mutual-funds-swapping-managers-at-alarming-rateand,
"About three quarters of the portfolio managers in our sample receive performance linked pay from investment advisor. Managers with performance based compensation exhibit superior abnormal performance, especially when advisors link pay to performance over longer time periods. However, we do not find that alternative compensation arrangements such as pay linked to fund assets or advisor profits are associated with better fund performance.
Performance linked pay is more prevalent among larger investment advisors, non-stakeholder portfolio managers, portfolio management teams, and in-house managed funds."
Portfolio Manager Compensation in the U.S. Mutual Fund IndustryHow much of your overall portfolio is entrusted to a manager or a management team?
Manager risk potentially equates to manager reward where managers and management teams bring added value to an investement. Conversely, Index funds (index ETFs) have no manager risk/reward, but provide "average returns" that move an investment at least half way along the reward curve. I believe both active (management) and passive (idex) should be part of one total portfolio.
As a way of putting this all together, I believe a percentage of my total investment portfolio should be placed in low fee index funds or index ETFs...or possibly even a single target date retirement funds. All that is required with these investments would be periodic reallocation. VTI ,VT(not sure why this is not hyerlinking... Vanguard Total World), BND in equal amounts (say 20-25% each) would leave me with 25-40% of my portfolio to be invested in non-index funds.
Finding these managed mutual fund gems is why I'm here at MFO and I appreciate this forum.
What are your favorite managed mutual funds that provide a unique strategy (best ideas, niche markets, opportunistic bets, etc.) with managers or mangement teams that provided added value over long periods of time.
What are you favorite fund managers...along with the fund that they manage?
Comments
FPACX (Steve Romick)
WSCVX (John Walthausen)
EAASX (Charles Reed)
BPAVX (Duillo Ramallo)
POAGX (Theo Kolokotrones)
GPGOX (Robt. Gardiner & Blake Walker)
Thanks D,
Your list reminded me of a website, Fundmojo, that dedicates part of its focus to manager success in category / sector. I took your first choice FPACX and screened it using the fund research tool (see location below)...also remember to select the hyperlink for the fund as a secondary step.
fundmojo
The site's purpose is "to help you find the top 1% of all mutual fund managers"
SteveRomick gets a Fundmojo "Master" rating and a score of .85 out of a possible 1.00. This score is based on these criteria:
There is also a link to "see other fund managers in this cataory", FPACX is considered a moderate allocation fund.
Finally, here is the company that Steve Romick keeps with other highly rated fund managers in this catagory.
A nice tool for manager selection screening. Not sure if the site keeps up with the musical chairs that goes on in the fund industry and it may not do such a great job of finding new managers.
I know that a lot of people like FPACX and I do like Steve Romick's investing style and reading his commentaries but I'm wondering how many investors can really stick with his fund for the long-term to really benefit.
Over the past 5 and 10 years - something like VWELX would've provided similar cushion-y performance and very similar returns as FPACX. So I don't how much benefit FPACX could've added to such a portfolio - especially more so if investors only have say 5-7% in FPACX.
Furthermore - between FPACX inception around 1993 to end of 1999, VWELX outperformed FPACX. So a balanced fund beat FPACX over this 7 year stretch - how many investors could've seriously been that patient to wait it out? It got so bad that Romick saw about 90% worth of invested assets head for the exits.
He does what he does best in sticking to his true deep contrarian value style and it can mean severe underperformance for many many years. I'm afraid his patience will outlast investors willingness to stick around.
Furthermore - the fund was way smaller back in 2000-2004 where it could pick up some decent amount of smallcaps and that was where it really shined but that is now way tougher to do with $13B+ in assests today.
Just 5 years ago - the highest praises went to the likes of DODBX and OAKBX as wonderful core, sleep-well-at-night, cushion-y performance, wonderful managed funds but rarely do they come up anymore. The same with the highly touted TAVFX.
Again, I really like Romick's thorough, cautious and hardened evaluation of every company before he buys --- but I just think that this'll be another fund eventually kicked to the side by investors because its contrarian investing style can severely lag for long periods - more so than investor's willingness to wait.
I'd also say that even though DODBX and OAKBX don't get a lot of fan fair now compared to 5 years ago, they are also great balanced options. I think TAVFX changed management a few years ago so that could change a lot.
We certainly do talk most about the funds doing best in short term returns, especially new funds. But I'm guessing DODBX, FPACX, VWELX and OAKBX are still core investments in many portfolios now and likely will be 5 years from now too.
Hi KG,
I follow your thought process and appreciate your comments. Seems to me we can buy the index or search for a manager who can beat the index in such a way that, as investors. we have the confidence to stick around when the manager's strategy isn't working. I believe it is Skeeter who takes a multi-fund approach (3-4 funds / invesment sleeve) to diversify manager risk. As I see it the index gets you most of the way to your investment goal. Its an investors hope that a manager adds alpha (higher return), minimizes Draw Down % (lower returns)... ideally both. Consistentcy over time plays a role in "how well we sleep at night" as we hold these funds.
Hi MikeM,
I'll add PRWCX and BUFBX to your list...two funds that usually provide me with straight solid shots down the middle of the fairway...now if only my chipping and putting funds where more consistent I might enjoy the walk.
"We certainly do talk most about the funds doing best in short term returns, especially new funds. But I'm guessing DODBX, FPACX, VWELX and OAKBX are still core investments in many portfolios now and likely will be 5 years from now too"
Excellent comment Mike, I can attest to that because in past 10 years I have owned 3 of the 4 funds. The 4th VWELX, I purchased in 2012 in a 529 plan for my daughter with 3 kids and still have that. I no longer own the other 3.
I am really glad this topic has become a discussion item. While I do think index funds have their place, I also firmly believe there are more than a few really good managers and management teams. Without places like fund alarm or the small group of fiduciary RIAs out there, however, it can be difficult for investors to identify who the really good and talented managers are.
We spend a LOT of time in our due diligence process talking with managers. Since we are, in someways, marrying our clients and the managers we hire, we want to really feel confident about who we hire. After we have done our initial screens over days/weeks/months and have identified a fund manager who appears attractive to us, we spend time reading fund documents - prospectus, semi/annual reports, SAI, shareholder letters, etc. From there if we are still interested, we send the manager(s) our own questionnaire. In industry terms, this is called an RFP (request for proposal), and we include things that are not part of the official documents listed previously. When we get the written responses back from the managers, if we still like what we see, we set up a private call with the managers.
After all of this, we make a decision to begin taking a position with the manager or to pass. If the decision is to move forward, we decide which fund the new one will replace. After all, if we do not do this, we are just becoming fund collectors. This is sometimes the hardest part of the decision, since we have relationships with each fund manager and the fund company teams.
I hope this begins to provide a glimpse of the process. It does take a long time, but once we have made a final decision, we can have some confidence that we have a pretty good idea of who we hire to manage our clients' dollars. Of course there are times that it does not work out. No one bats 1000.
As for Dodge & Cox, we do not use them in our Schwab client accounts, but they are in some client 401k plans, and some clients come to us with D&C funds in their existing accounts. At one time we used their stock and their international funds. There was a period of real underperformance in 2007-08, and the stock fund lost half of its assets. We were concerned that there was not much real active management going on, and we made a decision to drop D&C. It is always a discussion point when a fund with a fairly concentrated portfolio becomes a behemoth, and the fund had continued to load up on financials seemingly without abandon. D&C International has actually had a much stronger recovery than the Stock fund. Anyway, we moved on. Did we react too soon? Should we have stuck with them? The funds' deep-value bias clearly hurt them, but the numbers clearly indicate they have done well in comeing back. As a colleague says, "There are lot of great managers. We cannot own all of them." So we move on, but always try to learn any lessons we can. D&C are often the best options in some 401k plans, so we are usually glad to see them in those accounts.
Thanks BobC for chiming in. We seemed to keep the Lecture Hall noisey enough waiting for the professor to arrive. Are you familiar with the fundmojo site reference above in one of my posts and here:
fundmojo
They site tends to focus on the fund manager side of the equation more so than other sites I have visited. A score is asigned according a criteria listed here:
Criteria
Also, Best fund managers by sector/category:
Best Managers by Category
Do you have a favorite "ratings" site for fund manager?
Thanks again for your input here and in other threads.
So I urge caution when looking at the grade given managers, as well as the good and no-so-good things said about each fund. Most of these comments are how the manager stacks up to others in the same style box. So, in the case of OSTIX and many others we use, the comparison is invalid. John Osterweis would say his best comparison is the S&P 500, even though his fund does not look at all like that index.