The New Mutual Fund Dangerhttp://www.fool.com/investing/general/2013/08/28/the-new-mutual-fund-danger.aspx Amanda Kish, CFA,
August 28, 2013
Actively managed mutual funds are used to criticism. For decades now, investors and talking heads have bashed active funds for their high fees and lackluster performance. And these criticisms are well-deserved: Many active funds are too pricey and a majority won't be able to beat their index over the long run. But this year has seen a new and growing threat to the stability of many of these funds.
Changing of the guard
According to Morningstar data that was collected on behalf of U.S. News & World Report, fund manager departures have been hitting record levels as of late. The Morningstar data shows that so far this year, 665 funds have implemented a change in management. If that pace continues through the end of the year, that number could reach more than 1,000. In comparison, 783 funds underwent a management change in 2012, while 747 made a switch in 2011 and just 626 did in 2010. That means there will be many more fundholders forced to reevaluate whether or not to continue owning their funds.
Given actively managed funds' generally poor performance in recent years, it's not terribly surprising that management shake-ups are on the rise. Active funds as a group greatly lagged their indexes during the most recent bear market and in its immediate aftermath. In fact, according to Morningstar, while the S&P 500 has posted an annualized 8.3% return over the past five years, the average actively managed large-cap blend fund has only measured in with a 7.2% showing. So while the games of manager musical chairs is understandable, the results aren't always beneficial for investors.
Out with the old
Of course, manager changes can also be beneficial for funds. For example, Fidelity Large Cap Stock (FLCSX) was a floundering, undifferentiated offering before manager Matthew Fruhan took over in 2005. In the decade before Fruhan came on board, the fund lagged the S&P 500 Index by more than 2 percentage points a year, gaining 7.5% on an annualized basis compared to 9.8% for the S&P. However, Fruhan proved to be an able skipper and the fund's performance has improved markedly under his guidance. More recently, he has helped boost returns with a hefty dose of financial stocks such as JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), and Citigroup (NYSE: C), all of which made their way into the portfolio because Fruhan felt they had the ability to meet the requirements of a stricter regulatory banking environment while still being able to grow earnings. Since the start of his tenure, Fidelity Large Cap Stock is up 8.8% annualized versus 6.9% for the S&P 500.
And in with the new