Morningstar Advisor - February/March 2012 - (Page 14)

Know-How What to Ask When a Fund Manager Leaves By Christine Benz Bill Miller’s impending departure offers a blueprint for how to react to the news. Bill Miller will be stepping down from Legg Mason Capital Value LMVTX in April, and while his departure is a particularly high-profile one, “Should I stay or should I go?” plagues any client invested in a fund that’s seen a manager change. Take time to evaluate the implications of the change—for the fund’s positioning, performance, and role in your clients’ portfolios. solo-run funds. At LMVTX, Miller’s successor, Sam Peters, has worked alongside Miller as a comanager for the past year, but he’ll be running it solo once Miller steps down. Thus, while there is some continuity, Peters had only been aboard for a short while, and the fund will sink or swim on his watch. before Miller announced his departure, and it has also given shareholders a decent heads-up about the impending change. 5 Will the fund still be a fit for you? Say you originally bought a fund because you wanted large-cap growth exposure to counterbalance your client’s deep-value holdings. If the new manager has a history of buying stocks that are more blend-y than they are pure growth, and the new fund’s mandate gives him or her a bit of wiggle room, the strategic change may be significant enough to warrant kicking it out of a portfolio. 3 What do you know about the new person? Does previous experience on another fund provide any clues about the new manager’s investment style and, in turn, the implications for performance? Unfortunately, it’s not common for a manager’s past track record to be directly applicable to the new charge. Peters’ previous experience provides a good example: He’s been working as a comanager on Value Trust for only a year, and his stints as solo manager have been on different types of funds—Legg Mason Capital Special Fund LMASX, which focuses on mid-cap funds, and some Fidelity sector funds before that. 1 How active was the fund manager? A manager change shouldn’t be a huge cause for concern if the fund’s strategy is highly mechanistic. Jensen Quality Growth JENSX, for example, looks for companies that have had returns on equity of 15% or better for the past 10 years; its turnover is also minuscule. Thus, even though some of Jensen’s comanagers have retired in recent years, we’ve continued to like the fund. Legg Mason Value Trust, by contrast, employs a highly active strategy, with relatively high weightings in sectors like financials and next to nothing in basic materials. For this and other highly active funds, a manager change merits more scrutiny. 6 Could there be tax implications? Before deciding to sell for whatever reason, it’s worthwhile to check your client’s tax position in the fund: If there’s a gain and no offsetting losses elsewhere in the portfolio, selling will trigger a tax bill. Unfortunately, there could also be tax consequences to sticking around. If a fund has long-held winners on its books that don’t fit with the new manager’s approach, he or she could sell, forcing a capital gains distribution if there aren’t any offsetting losers. For Legg Mason Capital Value, the fund has substantial losses on its books that Peters could use to offset any winners if he decided to sell them, so taxes aren’t likely to be a concern for shareholders who hang on. K Christine Benz is Morningstar’s director of personal finance. 4 How good is the firm as a steward? While it’s never happy news when a firm loses a successful or long-tenured manager, the best firms lay the groundwork for that possibility, which can help ease the transition. Firms that are good stewards also do a good job of communicating with their shareholders along the way. In the case of Legg Mason Capital Value, the firm has done a lot right: Peters joined as a comanager long 2 How big is the change? While critics assail multimanager vehicles as being subject to mediocrity and groupthink, it’s safe to say that manager changes are less of a big deal for them than is the case for 14 Morningstar Advisor February/March 2012

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2012

Morningstar Advisor - February/March 2012
Letter From the Editor
Make a Difference Stories, Not Debates
How Concerned Are You About Europe?
Analytical and Independent
What to Ask When a Fund Manager Leaves
Past, Present, Future
Have Financials Gotten Cheap Enough?
Four Picks for the Present
Investment Briefs
Tactical Funds Miss Their Chance
Specialty Retail: Ad Hoc Opportunity
How Europe Is Making Its Crisis Worse
Impact on U.S. Economy Will Be Minimal
European Banks: Bargains or Value Traps?
Don’t Count the Euro Out Yet
Europe on the Brink
GoodHaven Realizes Its Vision
How Index Trading Increases Market Vulnerability
Nonlisted REITS: Handle With Care
Safety Picks for the Many Moods of Mr. Market
On the Prowl for Large- Blend Index-Beaters
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Math That Matters

Morningstar Advisor - February/March 2012