A Great Owl Fund is Certifiably Dead

Lawlar

I was pleased to see a fund I own, Meridian Growth Legacy (MERDX), listed as one of the 20-year Great Owl Funds. It’s a great fund, and I have a lot of confidence in it.

But the original owner/manager of the fund died a few years ago. Meridian was bought by Arrowpoint Partners. The new managers, Brian Schaub and Chad Meade, were formerly with Janus. They have an investment methodology that is very different from that employed by the former owner. The fund also has a new expense structure (higher fees).

I realize the approach for selecting the Great Owl Funds doesn’t make adjustments when there is a change of managers (and I hate to be critical of the fine work on this site). Nonetheless, I think there should at least be a
n asterisk after Meridian’s name to inform readers that today’s Meridian Growth Legacy has nothing in common with the fund of 20-years ago, except for the name (and even that was changed). The original fund is certifiably dead.

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Lawlar

I still own the fund, and think it's future is bright. I just don't think it is entitled to claim credit for the performance record of the prior ownership.

Readers who are using the Great Owl approach might be mislead if they think Meridian Growth Legacy is the old Meridian Growth Fund.

davidrmoran

Right. All GO reading should be careful and salted just for these and other reasons. NICSX is not GO, among other things (I know, criteria maths).

msf

I understand your point (some of which I happen to agree with). At the same time, you seem to be selective in the changes that might be "asterisk'ed".

There was a previous change in managementt when Mr. Aster, the lead manager of the fund, died in early 2012. Mr. Tao, who had been an assistant manager since 2007 became co-manager along with Mr. England, who had been an assistant manger of Meridian Value since 2001.

The management company, Aster Investment Management, did not change at this time. When Aster Investment was later sold to Arrowpoint (Q3 2012), it did change mangers of Meridian Growth, as you noted. But it did not make changes to the management of MVALX, then called Meridian Value. (Mr. England managed that fund with Mr. Aster since 2001 and continues managing that fund, now called Meridian Contrarian, today.)

That seems to be more typical of management company changes. The company changes, but the managers simply wind up at the new company. If the change in management company were flagged for MERDX, it would also have to be flagged for MVALX, where it meant nothing.

The fund definitely changed direction, as signaled by its change in benchmarks from the Russell 2000 to the Russell 2500 Growth Index. But so did MVALX at the same time, changing benchmarks from S&P 500 to the Russell 2500, even though management didn't change. A change in direction can even happen gradually over time with the same manager and management company - FLPSX started as a domestic small cap value fund, and now looks like a mid cap global. So what should be flagged, and when?

While the fund did add new (and more expensive, some loaded) share classes at that time, the original share class persisted, with no change in fees. I believe that's the share class that Charles is using for his data. Again, this is not unusual. In the 90s, Michael Price sold Mutual Series to Franklin Templeton which added load shares and closed off the legacy Z shares. American Century added load classes and for a time closed some of its noload shares to new investors (from memory). And on and on. I believe the oldest share class is used in analysis, so these other classes don't matter.

The name of the fund did not change. It was, and is, Meridian Growth. What changed was that a share class identifier was added: Legacy, Investor, A, C. Just as Mutual Discovery (MDISX) became Discovery Z, and added A and other share classes.

Your overarching point, that this is not your father's Meridian Growth, is well taken. Though almost any event one would care to flag is not black or white - sometimes it matters, sometimes it doesn't. That's why one needs to dig into a fund, and not just choose it based on some screening criteria.

davidrmoran

>> FLPSX started as a domestic small cap value fund,

It did? Not doubting you, just have been in it from very early on and don't quite recall it that way. Should check.

msf

Maurice said:

I've had successful fund managers retire on me, but never has one died while actively managing the fund. The difference in each case has been that there was succession planning, and the retiree had some influence on choosing and training the successor.

http://www.harborfunds.com/14198.htm (HAINX manager died)

A difference between MERDX and HAINX is that Mr. Aster's death was an accident. Regardless, your point about planned succession is important - all companies, not just investment management companies, should have succession plans in place just in case someone gets run over by a bus.

A team of investment professionals with a combined total of over 22 years of working closely with Richard Aster at Aster Investment Management Company have assumed management responsibilities for the Funds. The current investment management team will continue to manage the Meridian Fund portfolios using the same investment philosophies, processes, discipline and standards that Aster Investment Management Company has consistently and faithfully maintained over many years

http://www.prnewswire.com/news-releases/richard-f-aster-jr-passes-away-139575418.html

Lawlar

The investment approach of the Meridian Value fund was maintained, along with its managers, and their office. But the Growth Fund was changed. Morningstar published an article on October 15, 2013, “Arrowpoint and Meridian Funds a Good Fit,” which partially described how Meridian Growth would be run:

“While Arrowpoint will keep most of AIM’s staff, the office in California, and the Meridian name, fundholders should brace for Arrowpoint to make some changes.
Mainly, Meade and Schaub will overhaul Meridian Growth, whose Morningstar Analyst Rating is currently under review during the transition. Aster built this portfolio by searching for companies capable of growing their earnings at least 15% a year. He avoided overpaying for his best ideas, which meant the portfolio’s price multiples were often lower than the mid-growth category average. He also kept the portfolio focused on just 45 to 55 holdings and routinely avoided commodities and energy, investments he deemed too volatile. Aster posted a 12.8% annualized return over a 28-year stint, outpacing the typical peer by two percentage points.

"Under Meade and Schaub, the fund is likely to diverge from its historical profile in several ways. First, Meridian Growth will become more diversified. At Janus Triton, the pair ran a portfolio of 70 to 90 holdings. They’ve also stated that they will largely wind down the fund’s existing large-cap holdings, restricting it to stocks roughly below the $10 billion market-cap mark. The fund is also likely to sport energy stocks, too, because Janus Triton owned those types of firms. In all, shareholders should expect the fund’s historically low turnover to increase in the near-term as the new managers reposition the fund. “

I don’t want to make a big deal about this. I’m just suggesting an asterisk. I'm concerned that someone may simply rely on the GO rating and not realize that there has been a material change. Anyone considering an investment in this GO would probably be better served by studying the past record of Janus Triton and not Meridian Fund.

msf

davidrmoran said:

>> FLPSX started as a domestic small cap value fund,

It did? Not doubting you, just have been in it from very early on and don't quite recall it that way. Should check.

Hard to find anything going back that far, but I did come up with this from Nov. 1997:

"Don Phillips, 35, president of Chicago fund rater Morningstar, ... has invested 75% of his portfolio in 25 mutual funds ... all but four of them are value-oriented. The exceptions are Brandywine, Fidelity Emerging Growth, PBHG Growth and Strong Growth. The others include large-company stock funds Clipper and Selected American Shares, mid-size company, Oakmark Select and small company, Fidelity Low-Priced Stock."

That is, FLPSX was small company, value-oriented.

I'll bet you don't remember it being a load fund, either
Fidelity Removes Loads From Five Funds, The Street, 06/23/03.

msf

"The investment approach of the Meridian Value fund was maintained, along with its managers, and their office. But the Growth Fund was changed. Morningstar published an article ..."

I think you're missing my point. There are over 400 funds in the GO database. On what basis would you have an asterisk attached? Certainly you're not suggesting that Charles cull every article on each of the funds to see if someone thinks something important happened. Even if that were done, the absence of an asterisk could just as easily lull someone into a false sense that nothing changed, merely because an article hadn't been written about the fund changing direction.

You mentioned name change (as an indicator?). Meridian Growth didn't change its name, it just added share classes. In contrast, Meridian Value did change its name to Meridian Contrarian. Thus demonstrating that name changes can be false indicators. (M* commentary says that the name change merely reflected better what the fund had been doing all along.)

I suggested another indicator - when the fund changes its benchmarks. Both funds changed them. Since Meridian Value (Contrarian) didn't change its investment approach, benchmark changes can also be false indicators.

Management change? Happens all the time. One of the knocks against Fidelity used to be that you never knew what you were getting, because each manager change meant an overhauled portfolio and Fidelity was constantly changing managers. On the other hand, T. Rowe Price does an outstanding job of transitioning managers and maintaining consistency in its funds across transitions.

Number of holdings? Maybe. Style box? Maybe also, though many funds gradually drift back and forth over a year or more (which is why M* waits a long time before reclassifying most funds).

In short - how should one define material change in such a way that it is easy to identify, and that there are neither too many false positives (flagging funds that didn't change), nor too many false negatives (failing to flag funds that did change)? If the asterisk isn't all that reliable, people won't trust it, even if it is attached to this one particular fund.

Meridian Growth (Legacy class) clearly changed its investment style. But that's not the question.

davidrmoran

I well remember those 3% Fido loads, especially on the Select family. I started my 401k in the 1980s and we could put a portion in Select Technology for no load. In the early 1990s ditto for FLPSX, thank goodness, which had started at the crack of 1990, $15 stock price limit, flexible. I had gone on to work at other tech companies, often enough ones with low share prices, so that caught my eye, plus Tillinghast was a young NE guy, and Fidelity was rocking; my Midwestern father had owned Trend decades earlier. The quote you cite shows a little bit of default laziness on the part of Money magazine, I say, and I am sure if I dig in Boston Globe archives I can find interviews through the 1990s and beyond with Tillinghast and also probably FLPSX shareholder reports in the bottom of boxes in the basement likewise explaining the actual spread of holdings' capitalization (pretty narrow, given the $15 limit, raised a decade later or so to $25, now $35). But not everything SC by any means. As recently as 2001 it was still technically classified as SCV, so there you go, even as its holdings were not much like any other SC fund, and that was true a decade earlier to some extent.