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The Reformed Broker

Axl Rose and your investment team

While band names and fund families may keep the same names, finding out if there are different players behind the scenes can mean a very different final outcome. Just look at the failure of the latest Guns 'N Roses album.

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In the mutual fund world, it is said that the manager doesn’t own his track record, the suits own it, and that’s all well and good.  But investors need to be aware that an actively-managed mutual fund’s track record is only valid if the same people and processes are in place.  Whether or not historical performance will mean anything at all in the future is a separate issue of course, but let’s not pretend that 99 out of 100 investors don’t look at past performance before just about any other available metric out there (because I can assure you that they do).

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Joshua has been managing money for high net worth clients, charitable foundations, corporations and retirement plans for more than a decade.

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The key is to understand that this happens all the time, with various responses by the fund families in the wake of a departing manager.

Take for example, the departure of Paul Hechmer from Nuveen Investments in June of 2009.  Hechmer was managing $14 billion in assets for Nuveen at the time including the high profile Tradewinds International Value fund.  After beating 96% of his peers over five years, Hechmer had a falling out with Nuveen over the company’s direction and quit, taking the knowledge and skills that built his fund’s track record with him.  But a glance at Nuveen’s marketing page for the fund would never tell you that, although it proudly displays the record itself.

Sometimes the fault lies with lazy journalism, one example comes from the high ratings accorded to Harbor International in US News & World Report’s “Best Funds” rankings.  The magazine, aimed squarely at relatively unsophisticated investors, makes no mention of the fact that lead manager Hakan Castegren passed away in 2010 after putting up great numbers for the fund since 1987, making up the majority of the fund’s long-term performance.

In contrast to these examples of obfuscation, we can point to some scenarios where the transition was handled in an orderly way.  Superstar equities manager Chuck Akre (13% annual returns from 1996-2009) left FBR in 2009 to start his own Akre Focus Fund.  Akre had built up quite a reputation as a value guy who was able to find faster-growing value stocks in the haystack and the FBR fund he ran soon topped a billion in assets.  But eventually, he wanted to do his own thing.  The good news is that two of Chuck’s top research lieutenants who had been schooled in the Akre methodology were given the reins.  So here we have an example of some continuity, some sense that although the manager was leaving, his process would live on lending some legitimacy to marketing that track record.

Another positive example can be found at First Eagle Global, a fund I own for almost all of my clients and one that exemplifies how the torch should be passed from one manager to the next.  It was obvious that the legendary Jean-Marie Eveillard (a track record spanning decades) couldn’t run the value-oriented fund forever and that sooner or later a younger manager would have to take over.  The relationship between Eveillard (pictured at left) and his replacement Matthew McLennan at the $30 billion fund is said to be one of mentoring and frequent communication.  This is helpful to me as an advisor in understanding how the historical values and performance of the fund make the transition.

TCW is not the only fund to lie by omission in its marketing - managers jump to new funds all the time after all and even the long-term superstars have to retire at some point.  Often the journalists and fund-rankers make no mention of these changes so it is very important that advisors and investors take this upon themselves.  Because there are more examples like TCW Total Return Bond out there than there are examples like the Chuck Akre or the Jean-Marie Eveillard case.

While band names and fund families may keep the same names, finding out if there are different players behind the scenes can mean a very different final outcome.

Full disclosure: The author is currently invested in DoubleLine and First Eagle Global mutual funds for both clients and personal accounts.  

Disclaimer: Any discussion here of historical track records and performance data for products sold under a prospectus is solely for the purpose of exposition.  Past performance is not a guarantee of future results.  Investors should not rely on the opinions of the author as statement of fact or make investments in any of the funds mentioned without first pursuing their own course of research and determining whether their own risk tolerance and goals align with the stated objectives of the products themselves.  

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