Clients often wonder why we Watch List plan investments rather than automatically recommending funds for removal, particularly when there are manager departures or performance concerns. To answer this question, we thought we’d share a case study around one large cap value offering.
In June 2014, the investment manager announced that the fund’s founding and sole Portfolio Manager (PM) was stepping down. While this might give some investors pause, the firm announced this move over a year in advance of his planned departure date and named his successor. The successor worked alongside the PM for many years on a different strategy in the same asset class with a similar philosophy and process. While the departure of any PM can raise concerns, ultimately Multnomah Group’s Investment Committee decided that the lengthy transition period and the successor’s familiarity with the fund and its investment management did not warrant a recommendation for removal.
Over the course of 2014 and into early 2015, the fund’s relative performance suffered. On deeper analysis, we found that much of the underperformance was attributable to a single sector. The PM had a strict valuation discipline and found few opportunities to invest in the well-established quality companies he preferred, leading to a sector weight half that of his benchmark index. The sector experienced a strong rally in 2014 and into 2015, making the fund’s underweight the most significant detractor from performance during the period. In April 2015, our Investment Committee placed the fund on Watch List. In accordance with our procedures, we distributed an initial commentary and periodic updates to affected clients as we kept a close eye on performance and the progress of the portfolio manager transition.
The fund’s performance continued to be challenged through early 2015, and we saw a partial recovery in the second half of the year, but performance slipped again briefly during the first quarter of 2016. Our team continued to monitor the fund’s performance closely and found that most of the difficulties were cyclical and to be expected given the manager’s patient, value-sensitive approach. Our team also participated in conference calls and meetings with the fund’s managers to better understand performance, the progress of the manager transition, and how the new manager was implementing his views into the portfolio. In July 2016, eight months after the manager transition, our Investment Committee upgraded the fund’s status to Satisfactory.
If we had recommended this fund for removal during its most challenging performance period in mid-2015, we would have “locked in” losses for participants. By July 2016, the fund had recovered its losses, and from Aug. 1, 2016 to Dec. 31, 2017 the fund gained another 25%[1].
Notes:
[1] Performance information is provided by Morningstar, Inc.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.
Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.