A new year brings a recurring list of best-ofs and top-tens, and mutual fund investors have come to expect Morningstar’s renowned Manager of the Year accolade, bestowed to managers across several categories for strong performance in the prior year. Fund managers covet the award as it brings tremendous recognition and gets slapped all over the mutual fund’s marketing material for years to come.
The real question is: are these accolades of any value for investors? Should investors revere a Manager of the Year and move their portfolio to these “star” individuals? When I began to do the research, I found that Morningstar had already done some digging. In early 2012 Morningstar’s John Rekenthaler posted an article titled “Do the Morningstar Fund Manager of the Year Awards Have Staying Power?” which you can find here (free signup required) http://news.morningstar.com/articlenet/article.aspx?id=532335&part=1.
The short answer is: No. Like other performance metrics, Fund Manager of the Year has no predicative power when it comes to future performance. Our favorite disclosure, “Past Performance is No Guarantee of Future Results,” aptly applies here. Let’s take a look.
Rekenthaler compared the performance of past Manager of the Year winners and their subsequent performance to that of the category average. Here’s the first issue: the funds should be compared to an appropriate benchmark, not their peers. Why? Because the majority of their peers are going to underperform the benchmark. An active manager’s goal shouldn’t be to be the least dirty shirt – to justify their existence, they must provide superior risk-adjusted returns.
Even with this poor comparison, Morningstar found that the majority of Manager of the Year recipients failed to outperform their peer group, let alone the benchmark. Here’s a few doozies for you to enjoy:
2010 International Manager of the Year winner Janus Overseas (JAOSX) lost -32.78% in 2011, a full 20.67% behind the benchmark. The fund gained only 12.42% in 2012, again missing the benchmark, this time by -4.44%. The fund’s trailing 5-year performance through 12/31/12 puts it in the 90th percentile of peer group performance.
US Equity Manager of the Decade (!) winner Bruce Berkowitz’s Fairholme Fund (FAIRX) was an industry darling at the end of 2010. In 2011 the fund cratered, dropping -32.42%, trailing its benchmark by -32.81% and coming in near dead last of its peer group (100th percentile). To be fair, the fund recovered some of these losses in 2012 due to some huge bets (including AIG and BAC), but investors drawn to this “star” manager were badly burned in the first year following the award and are still sitting on losses over the two-year period while the market is up some 18%.
Were there funds that continued a winning streak? Absolutely. Can we predict which funds will succeed and which will fail? Of course not (but we already knew that!) The Manager of the Year accolade, Star Ratings, Analyst Ratings – none of these has predictive power. Morningstar has already acknowledged the only item with predictive power: costs. Maybe some day in the future the Manager of the Year award will be replaced by a Consistently Low-Cost award, but I imagine the news media would tire of Vanguard winning every year.
Bason Asset Management 