Managers Who Have Bought Their Own Lagging Funds
Here are three out-of-favor funds in which manager investment has increased in recent years.
It can be profitable to invest like a contrarian, but it is very difficult to follow that path. Morningstar research has shown that fund investors must be willing to endure often prolonged bouts of underperformance to realize long-term outperformance. It's easier said than done, but one way to embolden oneself to hang on to or even add to a fund that has been stuck in a fallow period is to look at what the strategy's managers are doing with their money. Buying can be a good sign, and selling a warning flag.
Take Fidelity China Region (FHKCX), which has a Morningstar Analyst Rating of Neutral. Manager Bobby Bao's ownership in the fund dropped from the $100,000-$500,000 range at the end of 2016 to nothing at the end of 2017, just before he announced plans to step off.
Here are three funds with lagging recent records in which key managers have increased their investments. A variety of factors can explain the increased stakes, including the awards of deferred compensation plans finally vesting and simple market appreciation; so it's not clear that every case illustrates a manager writing an actual check to the fund. Still, increasing manager investment in a fund is a good sign that shows confidence and conviction in the process and further aligns him or her with shareholders.
The managers at BBH Global Core Select (BBGNX), a five-year-old offshoot of Silver-rated BBH Core Select (BBTEX), have upped their stakes in the world large stock Morningstar Category fund in recent years. They've done so even though the fund and its older and primarily U.S.-stock-focused sibling have trailed 85% or more of their respective peers in the five years ended March 2018. The funds buy and hold 25 to 30 companies with strong balance sheets, free cash flow, and returns on invested capital when their shares look cheaper than the businesses' estimated intrinsic values--and that approach has been out of favor. The team that runs both funds, however, has also made some errors. It has avoided some of the best-performing stocks of the period and owned some of the big laggards, such as Amazon-challenged retailer Bed Bath & Beyond (BBBY) and communications technology company Qualcomm (QCOM), which has been beset with revenue-draining licensing disputes and takeover drama.
Nevertheless, the managers continue to show faith in their process, which gets a Positive rating at BBH Core Select, where long-term results remain strong. (BBH Global Core Select is unrated but has been a member of the Morningstar Prospects list of promising strategies since 2015's third quarter). Tim Hartch, who is also lead manager of and has more than $1 million invested in BBH Core Select, had nothing in the global version of the strategy in March 2015, but by February 2016 he had raised his stake to more than $1 million. The investment of his BBH Global Core Select comanager Regina Lombardi also increased from between $100,000 and $500,000 in 2015 and 2016 to between $500,000 and $1 million as of the most recent disclosure in 2017.
Comanager Deborah Turner's stake in Franklin Mutual Shares (TESIX) has increased as the deep-value fund has trailed 90% of its rivals in the allocation--85%+ equity category in the five years ended March 2018. The fund's flexible and eclectic approach--the managers aren't limited by geography or capital structure--is tough to categorize. It has become deliberately more U.S.-centric in recent years, but its value predilections and still-significant non-U.S. stake have hindered the fund's results versus peers and its S&P 500 prospectus benchmark as growth has trounced value and U.S. equities have beaten international stocks in the past five years. Morningstar has enough faith in the fund's tried-and-true, analyst-driven, bottom-up stock-picking approach to maintain its Bronze rating. Its managers are keeping the faith, too. Turner, who has been a listed manager here since 2001 and at Franklin's Mutual Series unit or its predecessors since 1993, had between $500,000 and $1 million invested in the fund in 2015 and 2016, but she had more than $1 million in it as of the most recent disclosure in 2017. Turner's comanagers since 2005, Peter Langerman and David Segal, also have more than $1 million invested here.
RiverPark/Wedgewood (RWGIX) manager David Rolfe allowed his ownership in the concentrated large-growth fund that he subadvises for the RiverPark family to dip below $1 million from 2013 to 2016 as his St. Louis-based boutique restructured ownership among current and former employees (Rolfe and fellow major owner Tony Guerrerio bought out a departing longtime partner and allowed other members to buy in). Rolfe, who also invests heavily in the Wedgewood Partners Concentrated Large-Cap Growth separate account, boosted his helping of the RiverPark fund back above $1 million by early 2017, where it has stayed. The fund gained more than 9% annualized in the five years ended in March but still trailed 97% of its peers and the Russell 1000 Growth Index. Though some stock-picking gaffes, such as Coach (since renamed Tapestry (TPR)) and Qualcomm, have hindered the fund's results and contributed to a downgrade of its Analyst Rating to Bronze from Silver in 2017, its 20-stock, relatively low-turnover, valuation-conscious growth strategy also has been out of favor. The approach has rebounded from relative dry spells before in the more than 25-year-old separate account, which is why both the separate account and fund retain Bronze ratings.
Increased manager ownership does not guarantee that the fortunes of these out-of-favor funds will turn. There are many other data points and attributes to consider. But it at least indicates the managers are willing to share their investors' discomfort and remain confident in the strategy they're asking shareholders to support.
Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.