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Surprise Manager Exit Rattles Quirky Income Fund

We've downgraded Berwyn Income's Morningstar Analyst Rating to Neutral as new managers with no public record running multi-asset strategies take the helm.

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Berwyn Income is now a different strategy after longtime lead managers George Cipolloni and Mark Saylor unexpectedly resigned in February 2019. The new investment team includes some long-tenured Chartwell managers, but none have a public track record running multi-asset strategies. As a result, this strategy's Morningstar Analyst Rating is downgraded to Neutral.

This strategy lost a well-regarded skipper in George Cipolloni, a lead manager since 2006 who had worked with his second-in-command Mark Saylor since 2007. Together, they ran a go-anywhere, contrarian, conservative allocation strategy with strong results and good downside protection, delivering returns from both asset allocation and security selection.

Instead of maintaining the existing process, which would have been very difficult without the departing managers, Chartwell decided to create a new fund by combining two existing Chartwell strategies, a mid-cap value equity strategy and a core plus fixed-income strategy, at about a 30% equity/70% bond split. This fairly staid approach is a contrast to the prior strategy, which had an all-cap equity mandate and could invest in a broad menu of securities, including high-yield, preferreds, convertibles, and even cash, which could go as high as 20% to 30% of the portfolio.

David Dalrymple is now the lead for the equity sleeve. The bottom-up process is the same as Chartwell Mid Cap Value (BERCX), which he has run since July 2017. He has also run this strategy as a separately managed account since January 2004, with good performance. T. Ryan Harkins has been Dalrymple's comanager since 2004, and he is also a named manager on Berwyn Income. On the bond side, named managers Andrew Toburen and Thomas Coughlin run a core plus strategy, a replica of Chartwell Core Plus SMA. Toburen is in charge of Chartwell's high-yield efforts and has worked on the core plus strategy since its inception in July 2005.

The team plans to keep the equity and bond allocations fairly steady, but they do have flexibility to make changes to the asset allocation.

Process Pillar: Neutral | Patricia Oey 03/13/2019
The strategy now is a combination of an existing Chartwell mid-cap value strategy and core plus strategy, at a 30% equity and 70% bond allocation. However, it does not have a clear and established asset-allocation process. As such, the Process rating is downgraded to Neutral.

On the equity side, the managers employ a bottom-up approach to identify attractively valued mid-cap names. To avoid value traps, they prefer to hold higher-quality companies that are trading at lower valuations relative to their historical ranges, and tilt away from firms that are cheap on an absolute basis. Before adding a name to the portfolio, the team will evaluate the cause of the depressed valuation and determine if there is a clear catalyst for stock price upside, such as margin improvement or a change in the competitive landscape. They will sell names that have reached the upper end of their historical valuation range, or if the catalyst dissipates, or if the company underperforms 30% or more after purchase.

The bond managers also employ fundamental analysis and seek to reduce downside risk by holding higher-quality companies with stable to improving credit profiles. This sleeve can hold up to 50% in high yield to support the strategy's income mandate. They plan to keep duration close to the Bloomberg Barclays U.S. Aggregate Bond Index.

The equity sleeve aims to hold a compact portfolio of 35 to 50 securities. Currently, the equity-only Chartwell Mid Cap Value holds 34 names, with the top 10 holdings accounting for 38% of the portfolio. With a tilt away from deep value, the portfolio's valuation metrics are slightly higher than those of its benchmark, the Russell Mid Cap Value Index. Current top three holdings include AutoZone (AZO),  Duke Realty (DRE), and Expedia (EXPE). The portfolio currently does not have any notable sector tilts. Although no timetable was given, the managers plan to add large-cap dividend payers to the fund to support the fund's income mandate. This large-cap sleeve will be overseen by Jeffrey Bilsky.

The bond managers expect their subasset class exposure to remain within the following ranges within the bond sleeve: 15% to 50% for government issues, 15% to 50% for mortgage-backed securities/structured products, 25% to 75% for corporates, and a maximum 50% in high-yield. With a focus on higher-quality issuers, the portfolio's average credit quality sits between the Bloomberg Barclays U.S. Aggregate Bond Index's AA and the Morningstar Intermediate Bond category's BBB. As for sector exposure, the fund is overweight consumer cyclicals and financials.

The managers plan to maintain a fairly steady allocation of 30% equities and 70% bonds. But they do have some flexibility to make changes and all decisions will be made as a team.

Performance Pillar: Neutral | Patricia Oey 03/13/2019
The manager change took effect March 1, 2019, and the team expects that it will take about a month to transition the portfolio. With new managers and a completely different process, this fund's historical track record is no longer relevant for this fund's Performance rating, and thus is set at Neutral.

But it is worth mentioning that Chartwell mid-cap value equity and core plus fixed-income have solid, long-term track records as standalone strategies.

David Dalrymple and T. Ryan Harkins have run the mid-cap value equity strategy since its inception in January 2004. Over the life of the strategy through December 2018, returns (before fees) were 10.5%, annualized, above that of its Russell Midcap Value benchmark's 8.6%.

Since its inception in July 2005, the core plus strategy was managed by Christine Williams. Andrew Toburen and Thomas Coughlin are not named managers on the standalone Chartwell Core Plus Fixed Income strategy, but they each have been on the investment team for at least 12 years. From inception through December 2018, the strategy returned 4.9% (before fees), annualized, outperforming the Bloomberg Barclays U.S. Aggregate Bond Index's 3.8%.

People Pillar: Neutral | Patricia Oey 03/13/2019
The prior managers George Cipolloni and Mark Saylor were the only Chartwell managers who ran multi-asset strategies. The new lineup includes five managers with expertise in either equities or bonds. As a result of this change, the People rating is reset to Neutral.

The new lead equity manager is David Dalrymple, who is in charge of Chartwell's small- and mid-cap value strategies. All three strategies have performed well under his leadership (He has a 20-year track record for the Small Cap strategy). He is currently a managing partner and has been at Chartwell for 22 years and has 33 years of investment experience. T. Ryan Harkins is a listed comanager here as well as on Dalrymple's three other strategies. Harkins has been with Chartwell for 13 years and has 21 years of experience. Jeffrey Bilsky, who will oversee the large-cap sleeve (when it is added), has been at Chartwell for five years and has 14 years of related experience. He does not have a public track record as a manager.

Andrew Toburen is the lead bond manager and is assisted by comanager Thomas Coughlin. They are part of a five-person bond investment team that focuses on core and high-yield strategies. Toburen is a portfolio manager for Chartwell's Short Duration High Yield and High Yield strategies. He has been at Chartwell for 20 years and has 25 years of investment experience. Coughlin has been at Chartwell for 12 years and has 14 years of investment experience.

Parent Pillar: Neutral | Patricia Oey 01/07/2019
Chartwell Investment Partners was founded in 1997 and in 2014 was acquired by TriState Capital Holdings, a publicly listed bank holding company. With the backing of a new parent, Chartwell has sought to diversify its offerings and client base, primarily via acquisition. In 2016, it acquired The Killen Group and its three mutual funds, giving Chartwell an entry into the retail segment. In 2018, Chartwell acquired equity and bond strategies from Columbia Partners. But Chartwell remains a small player, with $10 billion in assets: 60% in institutional accounts, 20% in mutual funds, and the rest in managed and subadvisory accounts.

There are pros and cons to Chartwell’s roll-up approach. For a very small asset manager such as Killen, joining Chartwell allowed Killen’s portfolio managers to shed operational responsibilities and focus solely on investment management. However, for some Killen and Columbia strategies, there have been manager changes and a shift in investment focus, as Chartwell streamlines and integrates its acquisitions.

There have been challenges in the legacy business as well. In 2016, the growth-equity team was restructured after performance struggles. Around the same time, Vanguard removed the firm as a subadvisor on Vanguard Explorer and Vanguard MidCap Growth, resulting in the loss of $2.8 billion in assets. On balance, Chartwell receives a Neutral Parent rating.

Price Pillar: Positive | Patricia Oey 03/13/2019
This fund's below-average fees earn it a Positive Price rating.

The expense ratio for this fund's sole share class is 0.64%, which is below the conservative-allocation no-load average of 0.77%.

Parent Chartwell has a waiver so that fundholders' total costs, excluding acquired fund fees, do not exceed 0.64%.


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Patricia Oey does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.