BOSTON (AP) ? It’s an old story: A star’s rapid rise is cut short when high expectations aren’t met.
It happens in so many fields: sports, music, politics. Just look at the flavor-of-the-month pattern in the race for the GOP presidential nomination, where frontrunner status seems to invite trouble.
In finance, a star mutual fund manager’s performance slump can be costly, and not just for the star’s reputation. Also at stake are the millions of dollars invested based on the fund’s record ? and perhaps also based on any awards the manager won for those results.
There’s plenty of pain to go around among shareholders of funds run by recent winners of Morningstar’s manager of the year awards, and manager of the decade honors. Five of the eight selected since early last year are enduring slumps, and just one among the group remains near the front of the pack. Some are in such a deep funk that the manager’s exemplary long-term record could be at risk.
Morningstar is the most influential fund researcher around, and its award winners attract new cash from investors because of those honors.
Morningstar’s research director, Russel Kinnel, notes that the awards recognize superior past performance, and aren’t intended as a fund equivalent of a “buy” rating for a stock. Morningstar’s judgments about how funds are likely to fare going forward are incorporated into its “Analyst Ratings,” introduced last month to supplement Morningstar’s performance-based 1- to 5-star system.
Still, the lousy year-to-date results from most of the latest top manager winners illustrate the folly of picking a fund solely based on past performance, or awards:
Starting with the steepest drop-off, here’s a look at the five Morningstar winners suffering slumps:
1. Bruce Berkowitz – Domestic Stock Fund Manager of Year, 2009; Stock Fund Manager of Decade (2000-09)
His Fairholme Fund is down 29 percent this year, compared with the 1 percent total return of the Standard & Poor’s 500 index. That’s worst among hundreds of funds in Fairholme’s large-value stock category. Its recent loss is one reason why Fairholme (FAIRX) has shrunk to $8 billion in assets, less than half its total early this year. A bigger reason is the huge amount of money that investors have withdrawn. It’s a stark about-face, after attracting a net $4.3 billion in 2010, following the double-honors that Berkowitz won that January. Fairholme runs hot and cold because it owns a relatively small number of stocks, 19 at latest count. Some three-quarters of the fund’s assets were recently invested in financial services stocks, including American International Group and Bank of America. Both are down more than 50 percent this year.
2. Michael Hasenstab – Fixed Income Manager of Year, 2010
Templeton Global Bond (TPINX) has lost 2.4 percent this year, placing it in the bottom 3 percent in its world bond category. The fund has lagged because of its investments in the currencies of South Korea and Australia, which have weakened relative to the U.S. dollar. Also, Hasenstab recently positioned his fund for a rise in interest rates that hasn’t yet panned out. This fund has swelled to $61 billion in assets, including $16 billion in new cash attracted last year.
3. Brent Lynn – International Stock Manager of the Year, 2010
His Janus Overseas Fund (JDIAX) has lost nearly 29 percent this year, ranking it in the bottom 3 percent of its foreign large growth category. Janus Overseas’ performance has suffered partly because its recent 38 percent weighting in emerging markets stocks is more than triple the average of its peers. Stocks in the world’s fastest-growing economies have fared worse than those in developed markets this year.
4. Bill Gross – Fixed Income Manager of the Decade (2000-09)
The manager of the world’s largest fund, the $244 billion Pimco Total Return fund, recently wrote a letter headlined “Mea Culpa” to shareholders, acknowledging his off year. Total Return (PTTAX) has posted a 2 percent gain this year, trailing 91 percent of its peers in its intermediate-term bond category. It’s the worst performance in more than a dozen years for Gross, a three-time winner of Morningstar’s bond manager of the year title, in addition to honors covering the last decade. He’s lagging this year primarily because he avoided investing in low-yielding U.S. Treasurys, which have rallied as investors have sought out the least-risky assets. Gross began buying government bonds in July, but it hasn’t been enough to turn around performance. “This year is a stinker,” Gross wrote in his October letter to shareholders. “Pimco’s center fielder has lost a few fly balls in the sun.” He cited his failure to foresee the global flight to quality investments triggered by the European debt crisis and the impact of the political impasse in Washington on the country’s growth outlook.
5. David Herro – International Stock Manager of the Decade (2000-09)
His Oakmark International Fund (OAKIX) is down nearly 13 percent. That’s in the bottom 25 percent of its category ? uncharacteristic for a fund that finished in the top 2 percent the previous two years. Four of the fund’s top holdings as of Sept. 30. were financial stocks, and each is down more than 30 percent this year. A smaller fund that he also runs, Oakmark International Small Cap, is having a middle-of-the-pack year in 2011.
Among the eight funds honored by Morningstar since January 2010, just one remains a frontrunner. Sequoia Fund (SEQUX) ? last year’s stock fund of the year, run by Robert Goldfarb and David Poppe. It has returned 12 percent this year, in the top 1 percent among large-growth funds.
Sequoia’s record, however, illustrates a point worth remembering: An off year here or there doesn’t make a specific fund unsuitable for long-term investment. Sequoia finished in the bottom 3 percent among its peers in 2006 and 2009. Yet it maintained a strong long-term record because of its frequent top results.
Kinnel says shareholders who took Morningstar’s recent awards as a cue to invest in one of the five slumping funds may end up doing fine, if they stick with it for the long haul.
He points out that most manager of the year winners dating to 1987 continued to deliver strong long-term results after they were honored. Kinnel expects that will also be the case with Morningstar’s three selections for its next annual awards, to be named next month.
“It’s certainly not a jinx to win,” he says. “When you look at short-term results, it can end up being just a lot of noise.”
Questions? E-mail investorinsight(at)ap.org