Three Funds in the Midst of Turnarounds
Poor past results don't always portend a poor future.
Human beings tend to extrapolate history into the future. If a sports team, a company, or a mutual fund has done poorly in the past, we're naturally prone to think it will do poorly going forward. Clearly, though, changes can come to pass that fundamentally change the situation. A new owner or head coach can reinvigorate a flailing sports franchise, as an executive can a firm. When an executive turns around one flailing company, as Jaime Dimon did at Bank One, investors start to believe that person can do it again--as many think Dimon will at J.P. Morgan Chase & Co. (JPM).
For the most part, however, people rarely talk about mutual fund turnarounds. One reason is that because we're so ingrained to think that manager stability is good, we forget that keeping a mediocre or poor manager around forever is certainly not good. Also, we tend to see each fund as a ship and each manager as a skipper. And if the ship's a bad one--which we can trick ourselves into believing by looking at rotten past performance or a low Morningstar Rating--it's hard to think that a new skipper can steer it into more pleasant waters. There are also far more sensible reasons that we're skeptical of fund turnarounds. Oftentimes new managers follow the same or substantially the same strategy that has failed before. Or, similarly, the shop has its managers following such strict marching orders that it doesn't seem to matter who runs a given fund.
Still, it is certainly true that fund manager changes can work. In a recent article, Senior Analyst Bill Rocco outlined four instances in which management changes shouldn't trouble investors: when there is a partial manager change at a good fund, when a long-tenured analyst or assistant manager takes over as lead manager, when a talented outsider arrives, or when a solid manager inside the firm takes over a lagging fund. Today we'll use Morningstar's Premium Fund Screener to search for funds that might be examples of these last two scenarios.