I wanted to check how a former fund of mine was doing, as it was a fav for many years, UMBIX. It was managed by David Williams; the fund had an impeccable record (15 yr record besting the S + P) but was relatively unknown by people that did not own the fund. When he retired in 2012 I sold it. In its place in 2013 I bought Columbia Contrarian Core (SMGIX). They are both managed by an experienced manager Guy Pope, have identical top 25 holdings, identical 2013 return. UMBIX is rated 2*, SMGIX 5*. Is a fund punished so severely for having a new manager? I know that one year return is little to go on, but since the funds are so similar this seemed very incongruous and harsh. Comments welcome, I find it very arbitrary.
Comments
Here's the formula, from M*:
Funds are ranked within their categories according to their risk-adjusted return (after accounting for all sales charges and expenses), and stars are assigned such that the distribution reflects a classic bell-shaped curve with the largest section in the center. The 10% of funds in each category with the highest risk-adjusted return receive five stars, the next 22.5% receive four stars, the middle 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star.
Funds are rated for up to three periods--the trailing three, five, and 10 years and ratings are recalculated each month. Funds with less than three years of performance history are not rated. For funds with only three years of performance history, their three-year star ratings will be the same as their overall star ratings. For funds with five-year records, their overall rating will be calculated based on a 60% weighting for the five-year rating and 40% for the three-year rating. For funds with more than a decade of performance, the overall rating will be weighted as 50% for the 10-year rating, 30% for the five-year rating, and 20% for the three-year rating. The star ratings are recalculated monthly.
If a fund changes Morningstar Categories, its historical performance for the longer time periods is given less weight, based on the magnitude of the change.
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The non-risk-adjusted numbers:
UMBIX
3 11.1% - 20% weight
5 18.6 - 30% weight
10 7.7 - 50% weight
SMGIX
3 16.2%
5 20.2
10 9.5
So, SMGIX leads by 5.1%, 1.6% and 1.8%. Add to that the fact that UMBIX has "high" risk scores across the board while SMGIX has "average" to "above average" ones and you can see whether the differences come from.
For what it's worth
David
Speaking of past crimes, UMBIX appears to have been either in the top or bottom decile year by year. Since most of those were good years, I understand staying with the manager until he retired, despite his last full year being one of the bad ones. (That contributed to the lower M* rating for the fund.) What I'm curious about is why switch to another, similar fund managed by the same manager (Pope) as one who had been transitioning into UMBIX for three years prior to Williams' departure?
There was a large distribution at the end of 2012 (around 13%), which could be a reason for leaving, though I might have waited until October or so, when the estimated distributions were announced. (Williams left in April.)
Different people deal with management changes differently - one size doesn't fit all. Just wondering what your thinking was in making what appears in hindsight to have been a change without a difference.
After I wrote the post, I thought that question might come up. When I sold it in early 2012 I went into Etfs VTI and VBK with the proceeds. At the time, I was with TD Ameritrade and only bought ntf. When I inherited a larger portfolio, I consolidated my portfolios and went to Merrill Lynch, where I had access to load funds waived or Institutional shares. My broker liked SMGIX, and I did too, since it had a similar style to UMBIX, with an experienced manager. The risk profile and returns seemed attractive, a well regarded manager and quite frankly did not look at Umbix again til today because David Williams had left. Under Williams, it had one of the best histories of any fund in its class over 15 years. It was volatile, but the good years made up for it
Thanks David, good info to have. I do like SMGIX, although I would never had looked at it without the load waived. It is my third largest fund after OYEIX and VDIGX.
The M* classifications are handy dandy - but they are very restrictive and also tend to make a huge difference in a fund's ranking. Move a lame horse from "Growth and Income" to "Conservative Allocation" (or whatever they call it) and it'll begin to shine like a thoroughbred.
Regards to all.
Think of the stars as similar to moving averages than a snapshot evaluation. Part of the problem comes not from the star rating algorithm but the pigeon-holing attempts by M* for the category. OSTIX that was mentioned recently is an example.
Outside of the M* evaluation, the story of UMBIX is intriguing and possibly has a great story behind it involving manager egos, franchise profit motivations, stakeholder interests, etc.
If I were to write a fictionalized script for the UMBIX movie, it would start at the end of 2008 where the fund family has panicked after the fund has lost almost 50% of its value, BoD and fund family stakeholders confront the manager who is adamant that he will eventually prevail and doesn't want to be replaced at the bottom. They settle on an uneasy compromise, he would be allowed to continue but with two other managers to oversee/babysit. The manager is deeply offended but wants to prove himself on the upside and so accepts. The babysitter managers have very different styles and so the manager really doesn't see eye to eye with them and the relationship is rocky. His bets do payoff and the fund overperforms on the upswing in 2009 and 2010.
The manager feels vindicated and makes sure all know about it further straining relations. He is left alone for a while until his huge bets on commodities in 2011 fail again jeopardizing the fund and starting fund withdrawals. After many contentious meetings in which the fund family afraid of losing a flagship cash cow arrives at a transition plan. The manager will transition out. The baby sitter who has his own successful fund doesn't want to move to this fund inheriting a problem child. The fund family doesn't want to lose the asset base by closing it. So they agree to a transition period where the babysitting managers will lend their names to the fund but not spend much time on it and have a caretaker group of managers mirror the other fund until the hemorrhaging stops and they can find a new manager or fold the assets into the other fund. Objections that this might not be in the best interests of the shareholders are dismissed with the statement "the smart money has already left and the dumb money won't know the difference between value and growth".
Sequel to appear in 2014.
Regards,
Ted
I'm thinking that may keep AUM low, so that's not entirely a bad thing.
Actually it is an interesting story, but one that is getting all to common in the mutual fund industry. Hopefully I get this correct:
UMBIX was created by U.S. Trust back in the 80s, advisor to Excesior Funds with David Williams as manager. I think in 2007 US Trust was sold to Schwab who then sold it to Bank of America and became part of Columbia funds who then sold off Columbia Funds. Prior to the meltdown of 2008, the fund had an incredible record, beating the S + P handily over 15 years. Williams announced his retirement about 2 years before he left, and I think half of the AUM left too. Pope became co manager and transitioned Williams out.
Any category breakdown has its problems. Personally, I like Lipper's approach a lot better, but there's nothing inherently wrong with the way M* does it. They use a consistent logic, and say that the star ratings are a snapshot that should be used as a starting point for due diligence, not the last word. The main criticism I have of their system is that you have to dig a bit to find the methodology.