In just a few weeks, Morningstar will announce their Fund Managers of the Year. It's a nice tribute, given in recognition of both a solid long-term track record and what Morningstar deems to be a consistent record of "putting fundholders' interests first."
But as much as the winning managers might justifiably take pride in their achievement, investors seeking to use this recognition as a way of identifying a manager who will provide market-beating returns in the future will be well-advised to keep looking.
The award has been given to 22 different domestic equity fund managers since 1987. And the roster of winners reads like a list of mutual fund stars past and present: Peter Lynch, Marty Whitman, Robert Rodriguez, Bill Miller, Chris Davis, and Mason Hawkins. Ask any investor over the past decade or so to justify their faith in active management, and the odds are good that at least one of these names would have been mentioned.
But here's an ugly truth: while these managers achieved market-beating returns on their way to the award, after winning it, their funds have actually lagged their benchmarks, by an average of 0.2 percent per year.
Granted, some of these managers have done quite well since their win. FPA Capital's Rodriguez, for instance, won in 1994, and has outperformed his mid-cap value benchmark by more than one percent annually since then. Third Avenue Value's Marty Whitman has guided his fund to a 12.3 percent annual return since his win in 1990, slightly outperforming the small-cap value index over that long span.[i]
But there have been quite a few winners who haven't been able to match their prior performance. Franklin Growth's Jerry Palmieri has trailed his benchmark by nearly one percent annually since he won the very first award in 1987. Legg Mason Value's Bill Miller, who won in 1998, continued his run for a few more years, but has stumbled badly recently, and now lags his benchmark by nearly 1.8 percent annually since his win.
All told, among the 22 funds that were led by a Manager of the Year award winner, 13 have trailed their benchmarks since the win, while nine have outperformed.
Of course there's another risk involved in hitching your investment fortune to an award-winning manager's star, one that Jeffrey Gundlach's departure from TCW Group made clear just two weeks ago -- there's no telling just how long your award-winning manager will be at your fund's helm.
Eight of the 22 winning managers no longer run the fund at which they won the award. Some funds, like Selected American Shares, have been able to plug in a replacement who has picked right up where their predecessor left off. Others, like Magellan and Skyline Special Equities, have struggled since losing their star manager.
So what to make of this information? The most obvious take away is that it's a reaffirmation of just what a crap shoot it is to pick a winning fund. Not even the combination of stellar past performance and a shareholder-first culture (present at many, but not all, of the firms that employed the previous award winners) -- as identified by no less an authority than Morningstar -- is sufficient to markedly increase the odds of finding a future winner.
Second, these results reinforce just how risky it is to tie your investment fortunes to a handful of apparent investment stars, no matter their track record. Remember the two long-term success stories mentioned at the outset? Bob Rodriguez is about to embark on a one-year sabbatical. Yes, he has a great deal of faith in his replacement, but whether you should is unknowable at this point. And Marty Whitman, while still going strong, is 85 years old. He's grooming his successor, obviously, but it's impossible to know how he'll fare once he's out from under Marty's watchful eye.
There's no denying that the winner of this year's award is to be congratulated. Undoubtedly, they will be armed with a stellar record achieved over many years, and through a wide variety of market conditions. But don't make the mistake of assuming that that record sheds any light on the likelihood of the manager's ability to outperform going forward. The record of the past Fund Managers of the Year reinforces one of the truisms of investing: past performance is not an indication of future results.
[i] Yes, I know. Morningstar currently classifies Third Ave. Value as a World Stock Fund. But it has been a small-cap value fund for much of its existence, and if you go to the trouble of matching the fund to its appropriate benchmark for each year in the period, you'll find that Marty's essentially tied his bogey.