With the recent retirement announcement of legendary
Vanguard Health Care Fund (VGHCX) manager Edward Owens, I feel it is important to
remind individual investors that knowing who is managing your mutual fund is
equally, if not more important, than the historical returns of that mutual
fund. I believe Owens is the greatest
health care sector manager of all-time.
However, when he walks out the door the historical returns of the
Vanguard Health Care Fund will become meaningless.
Too often individual investors search for mutual funds based
on historical returns alone. This type
of search can provide great results, and may even lead you to some great
managers. The historical returns do not
mean a thing if the manager who achieved those returns is no longer managing
the mutual fund. Manager tenure should
be explored hand-in-hand with the returns.
Let’s take a look at a few examples to illustrate what I am referring
to:
10YR Total Return
|
|
Yacktman Focused Fund (YAFFX)
|
218%
|
S&P 500 TR
|
109%
|
In this example I looked at the historical performance of
the Yacktman Focused Fund (YAFFX). Which
if someone were conducting a search based on ten year returns this fund will
appear near the top of the list. When I
look at the manager tenure it tells me that the ten year historical return that
impresses me was achieved by the same man that is managing the fund today. That man is Donald Yacktman.
Now let’s examine two more examples:
10YR Total Return
|
|
Allianz NFJ All-Cap Value (PNFAX)
|
112%
|
S&P 500 TR
|
109%
|
New Manager (4/2/07)
|
|
Allianz NFJ All-Cap Value (PNFAX)
|
-7%
|
S&P 500 TR
|
14%
|
10YR Total Return
|
|
Hartford Mid Cap (HFMCX)
|
180%
|
Avg MidCap Growth Fund
|
130%
|
S&P 500 TR
|
110%
|
New Manager (3/1/10)
|
|
Hartford Mid Cap (HFMCX)
|
29%
|
Avg MidCap Growth Fund
|
33%
|
S&P 500 TR
|
37%
|
In this example we have two different mutual funds that outperformed
the S&P 500 TR over the last ten years, and in the case of the Hartford Mid
Cap Fund (HFMCX) it also outperformed its category average. However, the managers that achieved the bulk
of these returns do not manage these mutual funds anymore. A new management team took over the duties at
the Allianz NFJ All-Cap Value Fund (PNFAX) on April 2, 2007. Since that time the fund has noticeably
lagged the S&P 500 TR. If you
conducted a search based on a trailing ten year return then this data will not
pop up on your radar. The same issues
can be seen with the Hartford Mid Cap Fund.
The ten year number looks great, but a new management team stepped in on
March 1st of 2010. Since that
time the fund has lagged both its category average and the S&P 500 TR.
Based on this data you may feel that avoiding a new manager
or management team is the best course of action. However, that is not always the case. Let’s take a look at the performance of the
FBR Focus Fund (FBRVX). FBRVX has been a
stellar mid-cap growth mutual fund.
10YR Total Return
|
|
FBR Focus Fund (FBRVX)
|
276%
|
Avg MidCap Growth Fund
|
130%
|
S&P 500 TR
|
110%
|
New Manager (8/22/09)
|
|
FBR Focus Fund (FBRVX)
|
51%
|
Avg MidCap Growth Fund
|
48%
|
S&P 500 TR
|
49%
|
The ten year total return is obviously impressive and will
put this fund at the top of the list for anyone conducting a ten year total
return search. Again, the returns are
impressive, but new managers took over on August 22nd of 2009. In this instance the managers have done a
fairly good job. Since new management
took over the fund they have been able to outperform both their category
average and the S&P 500 TR. I am particularly
impressed with its slight outperformance of the S&P 500 TR over this period
of time. The reason for this is that the
markets have been led by large caps for almost two years, and this fund has
done a good job navigating the world of mid-cap growth stocks.
I hope this information helps some of you. Never discount the manager’s tenure. It is hard enough for fund managers to beat
the S&P 500, and you can make things even more difficult for yourself if
you are investing based on someone else’s past reputation. It happens much more often than you might
think. Do you know how many investors
piled into the Fidelity Magellan Fund in the earl 1990’s based on its
historical performance? Take a look at
this example:
1982-1991 Total Return
|
|
Fidelity Magellan Fund (FMAGX)
|
733%
|
S&P 500 TR
|
406%
|
1992-Present Total Return
|
|
Fidelity Magellan Fund (FMAGX)
|
292%
|
S&P 500 TR
|
422%
|
Investors were piling into the Magellan fund based on
historical performance. Nobody seemed to
take into consideration the fact that the greatest equity fund manager of
all-time, Peter Lynch, retired from managing the mutual fund in 1991. Manager tenure is not a hard thing to
find. It is right there on Morningstar
when you pull up a quote for any given mutual fund. I would encourage you to consider the
managers tenure and what that management’s team performance is before investing
in a mutual fund.
Jon R. Orcutt, founder of Allocation For Life, is an
asset allocation strategist and author of “Master the Markets with Mutual
Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL
Model Portfolios available for members of Allocation For Life in self-directed
accounts at Folio Investing
http://www.allocationforlife.com/
http://www.allocationforlife.com/
