As this past summer came to a close, the conversation in New England quickly heated up as thoughts turned to the upcoming football season. While most people were ready to anoint Tom Brady and hand our beloved Patriots their fourth Super Bowl title before the first snap, I raised a few eyebrows when I suggested that not only would the Patriots not repeat as Super Bowl champs, but they also might not even win their division this year.
My reason for these treasonous opinions? The Patriots lost both their offensive and defensive coordinators in the offseason. These are the folks who provide the vision of how the team operates. A change at this level would fundamentally change how the team approached each game and overall execution, and performance would suffer as a result.
From football to funds
The same concept is true with mutual funds. When you purchase a mutual fund, you are investing in a particular asset class -- large-cap growth, small-cap value, etc. A fund's investment strategy translates directly into its performance and lies almost solely in the hands of the fund manager. Hence, your investment in a mutual fund is also a vote of confidence for the style and stock-picking approach of its manager. A change in a mutual fund's management should make you sit up and take notice, as it signifies a potential fundamental shift in how the fund will implement its basic strategies going forward.
Speaking of which ...
Back on Oct. 31, Fidelity announced the retirement of Robert Stansky, who had been the head of Fidelity's behemoth Magellan (FUND:FMAGX), a fund whose top holdings recently included the likes of GE (NYSE:GE), Microsoft (NASDAQ:MSFT), ExxonMobil (NYSE:XOM), and Citigroup (NYSE:C). Magellan has fallen on some pretty rough times the past few years and had turned in some pretty lackluster performance, so on the surface, the news didn't appear too worrisome. However, buried inside the press release was news that taking Stansky's place would be Harry Lange, the former manager of Fidelity's Capital Appreciation (FDCAX), a growth-oriented fund with significant sums invested in such relatively racy companies as Genentech (NYSE:DNA) and Nokia (NYSE:NOK). Another management change included a shake-up at Fidelity Small Cap Independence (FDSCX).
Both Capital Appreciation and Small Cap Independence are among the relatively few funds that have made the cut over at the Motley Fool Champion Funds newsletter (with Capital Appreciation being the one fund to have garnered two recommendations). The details of the Fidelity press release and their potential ramifications were not lost on the Fool's Shannon Zimmerman, who leads the charge over at Champion Funds. Shannon alerted the newsletter members of the situation on the message boards as soon as the news broke. The topic of manager changes at these funds and in general has been a topic of hot discussion since.
Is this really a big deal?
Can a change in fund management really have that big of an impact on a fund's performance? I found out the hard way just how quickly things can change. The folks at Allianz Funds announced a change to their AllianzRenaissance Fund (PQNAX) at the start of this year. It had historically been a good performer, near the top of its peer group in the mid-cap value asset class. I elected to hold on to it for a bit to see how things would shake out. Well, the fund tanked and ,as of Nov. 15, found itself practically at the bottom of its peer class (267 out of 276), down more than 10% for the year. The fund's annual report was even more telling: "The Fund's shares returned -1.27% for the year ended June 30. This return trailed the +21.79% return of the Fund's benchmark, the Russell MidCap Value Index." In a word, ouch.
The other share classes of Allianz Renaissance Fund have, predictably, fared even worse. The B Class shares (PQNBX) are dead last in its peer group (276 out of 276) with a year-to-date return of -10.68%. The C class shares (PQNCX) clock in a few notches higher at No. 273.
Should I stay or should I go now?
So, is it time to rush for the exits on Capital Appreciation and Small Cap Independence in light of their management changes? Well, one of the great things about fund investing is that you never have to make snap decisions you might regret later. With that in mind, Shannon has advised existing shareholders to hold their positions while he gives the new skippers a chance to show what they're capable of. In the meantime, prospective investors should look elsewhere for now.
This is all just par for the course over at Champion Funds. Every month, Shannon ferrets out another top-notch mutual fund. To date, the recommendations have bested their benchmarks by nearly seven percentage points on average. The recently introduced model portfolios assembled from Champion Funds recommendations have also outpaced their bogeys.
See for yourself by signing up for a risk-free trial of the Champion Funds service. Click here to get started.
Mark Evangelisto spends his Sunday afternoons parked in front of the television, cheering on the New England Patriots and patrolling the Champion Funds message boards. He owns shares of Fidelity Capital Appreciation. Microsoft is a Motley Fool Inside Value recommendation. The Fool has adisclosure policy.
