3 Prominent Funds With Bad Parents
These funds have parent companies with significant problems.
A version of this article was originally published in the November 2018 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
The Parent Pillar rating is one of the five pillars that goes into the Morningstar Analyst Rating for funds. Many of the best funds come from parent companies with strong, shareholder-friendly cultures. On the other hand, if a fund’s parent has regulatory problems, management turmoil, or other issues, it’s a red flag, whatever that fund’s other virtues might be.
Below are three prominent funds whose Negative Parent ratings indicate significant problems at the fund family level. That doesn’t necessarily mean the funds themselves are bad; two earn Morningstar Analyst Ratings of Bronze, while the other is rated Neutral. However, investors or potential investors would do well to keep a close eye on each parent’s influence.
Virtus Vontobel Emerging Markets Opportunities (HEMZX)
In 2015, Virtus settled with the SEC over its poor handling of regulatory wrongdoing at one of its subadvisors, F-Squared. That’s just part of the evidence suggesting that Virtus’ subadvisor due-diligence process has been substandard, and there has been a lot of churn among the firms that Virtus works with.
This Bronze-rated fund suffered a significant loss in March 2016 with the departure of manager Rajiv Jain, who had achieved great results in a decade at the helm. However, the fund still maintains a Bronze rating because the rest of the team behind those results mostly remains in place, as does the strategy. New manager Matthew Benkendorf worked closely with Jain on this and other funds for 17 years, and subadvisor Vontobel has added to its deep team of analysts, which now has 18 members and has been remarkably stable over time.
Third Avenue Real Estate Value (TAREX)
Personnel turnover has been a major problem at Third Avenue in recent years, with numerous executives and investment professionals leaving between 2015 and 2017. That instability, combined with SEC scrutiny over the collapse of Third Avenue Focused Credit, keeps the firm’s Parent Pillar rating at Negative.
This is another fund in transition from a shop with significant problems. It has a strong long-term record, with 10- and 15-year returns in the global real estate Morningstar Category’s top quintile, but the person most responsible for that record, lead manager Michael Winer, retired in early 2018 after 20 years at the helm. Remaining managers Jason Wolf and Ryan Dobratz have worked on the fund for years and are maintaining its deep-value strategy, but there has been quite a bit of analyst turnover on the real estate team, which helps keep the fund’s People Pillar rating and Analyst Rating at Neutral.
Transamerica Large Cap Value (TWQAX)
We recently downgraded Transamerica’s Parent rating to Negative from Neutral after the firm agreed to a $97 million settlement with the SEC over its mismanagement of quantitative strategies between 2010 and 2015. After the firm discovered problems in the models, it initially didn’t disclose those problems to shareholders or fund directors, suggesting that it prioritized asset-gathering over hiring best-in-class subadvisors.
Unlike the two funds above, this fund hasn’t gone through a recent management transition. Skippers Jack Murphy and John Levin have achieved solid results since then with strong execution of a fairly traditional, bottom-up relative-value strategy. That helps the fund earn a Bronze rating.
David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.