Russel Kinnel
Russel Kinnel, director of manager research at Morningstar Inc., Chicago, which tracks 620,000 investment offerings. Morningstar.com
Always study the person in charge when you are deciding whether to invest in a mutual fund.
When I am judging fund managers in these turbulent times, I try to evaluate how prepared they are for what I expect to be much greater volatility and unpredictability in coming years.
As the director of mutual fund research at Morningstar, Inc., I have studied and spoken with thousands of managers. Here’s what I look for now…
Managers who invest in their own funds. Only 54% of US stock fund managers… 41% of foreign stock fund managers… and 35% of taxable-bond fund managers invest in the funds that they manage. If they won’t risk their own financial future on their investing skills, why should you risk yours?
Check the fund’s prospectus and related materials online for information about how much money the managers have invested in the fund. For a fund to be a core holding in my portfolio, its manager needs to have at least $500,000 invested in the fund… or, if it’s a niche/specialty fund, at least $100,000.
Strength in both up and down markets. A manager’s long-term average returns should beat those of the majority of his/her peers, but averages don’t tell the full story of a manager’s investment style or ability to navigate through scary drops and powerful rallies.
Example: Bill Miller of Legg Mason Value Trust Fund beat the Standard & Poor’s 500 stock index for 15 consecutive years, leading investors to herald him as a paragon of consistency. But the fund plunged 55% last year and has underperformed the S&P 500 by margins of 10 percentage points or greater in each of the past three years. It is really only suited for long-term investors who can stomach such swings in performance.
Lots of experience and expertise. It’s going to take skill to make back last year’s losses. I want a pro who has at least a decade’s experience and who has shown that he can bounce back strongly from bear markets.
My favorite fund managers now…
Brian Rogers: T. Rowe Price Equity Income Fund (PRFDX). Rogers, who also is chief investment officer for all T. Rowe Price funds, focuses on bargain-priced stocks that pay dividends, which protect the portfolio against sharp drops while delivering a steady stream of income.
Manager’s years with the fund: 24.
Performance: 0.4%.* 800-638-5660, www.troweprice.com.
O. Mason Hawkins and G. Staley Cates: Longleaf Partners Fund (LLPFX). Hawkins and Cates often hold large amounts of cash when they can’t find enough stocks that they like. They buy a stock only if it is selling for 40% less than what they think it’s worth. They hold only about 20 stocks, and the top 10 account for about 65% of the portfolio’s assets. They favor troubled companies, which they hang on to for long periods — a strategy that has led to volatile performance at times, including last year, but they have beaten the S&P 500 Index by an average of nearly four percentage points per year over the past decade.
Years with the fund: 22 for Hawkins, 15 for Cates.
Performance: –2.9%. 800-445-9469, www.longleafpartners.com.
Thomas Perkins and Jeff Kautz: Perkins Mid Cap Value Fund (JMCVX). Perkins and Kautz look for mid-cap value stocks trading at or near their historic lows. They have achieved category-topping returns and rarely suffered a blowup of any one stock in their portfolio.
Years with the fund: 11 for Perkins, seven for Kautz.
Performance: 5.4%. 800-525-3713, www.janus.com.
Preston Athey: T. Rowe Price Small-Cap Value Fund (PRSVX). Athey holds many more microcaps (stocks with total share values of $250 million or less) in his portfolio than most small-cap managers do. He likes to hang on to his winners as they grow into small-caps and sometimes mid-caps. His stock-picking skills have produced annualized returns of more than 10% with below-average risk for the past two decades.
Years with the fund: 18.
Performance: 3.6%. 800-638-5660, www.troweprice.com.
Richard Pell and Rudolph-Riad Younes: Artio International Equity II Fund (JETAX): These managers beat foreign indexes by an average of more than six percentage points a year over the past decade. Part of that outperformance derives from a higher-than-average stake in obscure European emerging markets, such as Bulgaria and Romania, where they have great expertise.
Years with the fund: 14, including those with Artio International Equity Fund (formerly Julius Baer International Equity). That fund is similar to the four-year-old Artio International Equity II but is closed to new investors.
Three-year performance: –3.8%. 800-387-6977, www.artioglobal.com.
P. Zachary Egan and Louis Mendes: Columbia Acorn International Fund (ACINX). These managers aggressively pursue stocks with high growth potential, but they also focus on solid balance sheets and dividend yields.
Years with the fund: 10 for Egan, eight for Mendes.
Performance: 10.7%. 800-345-6611, www.columbiafunds.com.
William Gross: Harbor Bond Fund (HABDX). Gross, who also is managing director of the bond firm PIMCO and manages some of its funds, has won more manager-of-the-year awards from Morningstar than anyone else, thanks to a history of posting strong returns in a variety of market environments.
Years with the fund: 21.
Performance: 6.3%. 800-422-1050, www.harborfunds.com.
Dan Fuss and Kathleen Gaffney: Loomis Sayles Bond Fund (LSBRX). These managers go anywhere that they see value in the bond world, ranging from Uruguayan bonds to convertibles (which can be exchanged for stock) to high-yield (junk) bonds. This can create intense, short-term volatility, including last year’s plunge of 22%, but the long-term returns score better than 90% of their competition.
Years with fund: 18 for Fuss, two for Gaffney.
Performance: 6%. 800-633-3330, www.loomissayles.com.
*All performance figures are five-year annualized returns through July 31, 2009, unless otherwise noted.
