August 2016 IssueLong scroll reading

Keeping A Watchful Eye on Your Manager

By Leigh Walzer

By Leigh Walzer

It’s summertime. You are reading this from the vacation house. Or perhaps you are at the ballgame like Professor Snowball, rooting for the Quad City River Bandits. There is no event risk on the horizon. You trust your fund managers.  The portfolios can stay on autopilot until Labor Day.

As advisors struggle with the new fiduciary rules, they may wonder how frequently manager selection decisions need to be reviewed. We set out to answer the question: What is the likelihood that a portfolio left on autopilot will go bad over time.

We compared the ratings on 7000 mutual funds to see how much the probability metrics changed over time. Trapezoid’s data and models (which can be trialled at tell us the probability a given fund class will deliver skill over the next 12 months. For most funds, skill is a function of value-added from security or sector selection.  Skill takes into account a manager’s returns each period adjusted for factor exposures and other attributes.

If you have crossed off anything mathematical from your summer reading list, you can skip the next few paragraphs. Otherwise, bear with me.  Investment professionals might hope that probabilities are fairly stable, because it would imply the manager selection decisions you made years ago are still valid. And you could fulfill your fiduciary duty while working on your tan.

Actually, the probability for a typical equity or liquid alts fund today equals the probability from 9 months ago plus or minus a standard deviation of .14.  (This study is based on return data through April 2016. There are a few things going on with the data and the natural rate may a bit lower.) The median fund on the Trapezoid Honor Roll has a probability of .68. In nine months’ time, roughly 9% of these funds will see the probability deteriorate to below 50%. At that level, we adjudge (taking into account the availability of lower-cost passive alternatives) you are better off dumping the fund.

If you own a fund which just barely qualified for the Honor Roll 9 months ago with a probability rating of .6, the odds we will want to dump it is 23%.  On an annualized basis, you may need to change out 25% of your managers.

Confidence in portfolio managers is hard to earn and easy to lose.

Some professional managers review the managers more frequently for the riskiest asset classes. But the standard deviation is just as high for long only equities as for liquid alts, suggesting you need to be just as vigilant reviewing equity managers.

Funds Upgraded or Downgraded

We present here a subset of notable funds whose outlook, as measured by FundAttribution, has changed materially over the past 9 months. We include here the institutional ticker. Our confidence in the worthiness of a fund can vary greatly by share class: very few funds in our experience are good enough to justify paying a large upfront load.  However, when we re-rate a fund, the metrics for all fund classes tend to rise. The site indicates whether a particular class is good enough to make the Trapezoid Honor Roll. 


Category Fund   AUM ($bn)
All-Cap Growth MFS Growth Fund MFEIX 12.7
Large Blend Columbia Contrarian Core Fund CCCIX 9.8
Large Blend Fidelity All-Sector Equity Fund FSAEX 9.6
Large Value Federated Strategic Value Dividend Fund SVAIX 14.7
Large Value Invesco Diversified Dividend Fund LCEIX 17.7
Large Value JPMorgan Value Advantage Fund JVAIX 10.3
Large Value Nuance Concentrated Value Fund NCVLX 0.5
Mid-Cap Growth Janus Enterprise Fund JMGRX 8.3
Mid-Cap Growth Pioneer Growth Opportunities Fund PSMKX 1.3
Mid-Cap Value American Century Mid-Cap Value Fund AVUAX 8.0
Mid-Cap Value T. Rowe Price Mid-Cap Value Fund TRMIX 11.8
Foreign All-Cap Value Franklin Mutual Global Discovery Fund FMDRX 21.7
Foreign Large Blend American Beacon International Equity Fund AAIEX 2.7
Foreign Large Blend First Eagle Overseas Fund SGOIX 15.0

The Fidelity All-Sector Equity Fund (FSAEX) and T. Rowe Price Mid-Cap Value Fund (TRMIX) funds are closed to new investors and some other funds/strategies have experienced AUM growth.

Some of these funds have been upgraded by Morningstar in recent months. Funds which have risen in our estimation but have not been upgraded by Morningstar include JPMorgan Value Advantage (JVAIX), Pioneer Growth Opportunities Fund (PSMKX), and Franklin Mutual Global Discovery Fund (FMDRX).

Funds whose metrics have been downgraded included:

Category Fund   AUM ($bn)
Large Growth Sequoia Fund SEQUX 4.9
Large Growth Touchstone Sands Capital Select Growth Fund CFSIX 3.4
Foreign Large Blend Dodge & Cox International Stock Fund DODFX 51.6
Foreign Large Blend Templeton World Fund FTWRX 4.4
Foreign SMID Blend GMO Foreign Small Companies Fund GMFSX 1.0
Pacific Region Matthews Asian Growth and Income Fund MICSX 3.1
Eq/Bond Global GMO Benchmark-Free Allocation Fund GBMFX 15.6
Eq/Bond Global GMO Global Asset Allocation Fund GMWAX 2.7
Eq/Bond Global Wells Fargo Absolute Return Fund WABIX 7.4
Eq/Bond Global Wells Fargo Asset Allocation Fund EAAIX 4.0
Dynamic Alloc PIMCO All Asset All Authority Fund PAUIX 8.4
Dynamic Alloc PIMCO All Asset Fund PAAIX 19.2

Confidence in portfolio managers is hard to earn and easy to lose.  The woes of Sequoia Fund (SEQUX) have been documented at length by my colleagues over the past few months. Sequoia and Touchstone Sands Capital Select Growth Fund (CFSIX) both had steep falls from grace. Both Dodge & Cox International Stock Fund (DODFX) and Templeton World Fund (FTWRX) fell off the honor roll. The three GMO funds on this list the and two Wells Fargo funds are managed by the same personnel. GMO’s poor performance has shaken management’s faith in its managers so much that it is in the process of replacing the stock pickers with a quantitative approach. Quantitative investing seems to be coming more in vogue, but it was not the salve at two PIMCO funds managed by Rob Arnott

I was a bit surprised to find Matthews Asian Growth and Income Fund (MICSX) on the downgrade list.  Several Matthews funds including Matthews Pacific Tiger Fund (MIPTX) are fixtures on our Honor Roll. Matthews manages several funds with similar names which take rather different investment approaches to the Pacific Region. We observe MICTX missed out on on India in recent years and carried too much exposure to Industrials.

Our conclusion:

Good managers go through bad patches or long stretches with merely average performance.  Even after a careful manager selection process, the data next year won’t always validate the original decision.  Fiduciaries should review all managers annually and be prepared to change up to one quarter of mandates. Generally, you should look for returns which justify expenses, taking into account risk, factor exposures, consistency, and fluctuations in expense ratios. FundAttribution monitors all funds, making it easy to identify whether other active funds in the same space who may have earned their laurels since your last review.

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About Leigh Walzer

Mr. Walzer is the principal at Trapezoid LLC and publisher of He has 30 years of experience in the investment management industry as a portfolio manager and investment analyst including seven years at Franklin Mutual. In addition to his work evaluating active managers, he is well known for his work in the area of distressed debt and special situations. He received an AB in Statistics from Princeton University and an MBA from Harvard University.