MutualFundWire.com: Don't Become Janus; Why the M* People Pillar Matters
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Tuesday, July 9, 2013

Don't Become Janus; Why the M* People Pillar Matters


A mutual fund is only as good as its PMs, and if those people are leaving, that doesn't say much for the office culture or fund performance, Morningstar's Russell Kinnell said. Kinnell, director of mutual fund research at Morningstar, explained why Morningstar includes People as one of its rating pillars by running a few numbers that should tell you why this issue matters.

He grouped the funds by the number of PM departures in the five years prior to 2002 and 2007 and compared them in number of PM departures in the next five years. Kinnell created five groups: no departures, one departure, two departures and three departures. Funds that had no departures from 2002 to 2007 were less likely to use a PM than funds who previously lost three managers.

Though the correlation between performance and loss of PMs isn't as strong as present manager losses with future PM losses, there is a, at least, slight link. Top performing funds saw 1.4 departures in the next five years and funds in the second quartile lost 1.73 managers. Third-quartile funds had 1.94 departures on average. Most importantly, the idea that retaining PMs serves the business is simply common sense:

A stable manager's suite is no guarantee of great performance, but it's pretty hard to have a good outcome if managers continue to leave. You'll have to endure strategy changes and portfolio turnover, and you won't have as much to go on in figuring out a fund's risk/return profile. If a manager has a 15-year track record, you can at least build realistic expectations about the upside and downside from calendar-year performance.

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