Swedroe: Star Fund Managers Lose Luster

August 08, 2014

This year's acclaimed fund managers unlikely to repeat performance next year.

It was a particularly hot summer weekend day in St. Louis, too hot to be outside. So I decided to use the time going through the collection of articles I keep for future use. I save these articles, to be resurrected at a later date, in an effort to hold forecasting pundits and active managers responsible for their predictions or performance.

Among this stable of articles was one about Morningstar's 2012 fund manager of the year awards. Since all backward-looking crystal balls are perfectly clear, I thought it would be worthwhile to check in on how these superstar investors performed in 2013—the year after being selected.

The table below shows the winning funds in 2012 and their Morningstar percentile ranking based on 2013 performance.

Category Fund 2013
Domestic Stocks Mairs & Power Growth (MPGFX) 18
International Stocks Virtus Foreign Opportunities (JVIAX) 98
Virtus Emerging Markets Opportunities (HEMZX) 89
Fixed Income PIMCO Investment Grade Corporate Bond (PIGIX) 74
Alternatives TFS Market Neutral (TFSMX) 63
Allocation T. Rowe Price Capital Appreciation (PRWCX) 4
Average Rank 58

Performance-chasing investors—or investors who relied on Morningstar's 2012 awards to choose managers—were clearly disappointed, at least in terms of the next year's performance. Just two of the six funds beat even the average actively managed fund in 2013, and the average fund underperforms its benchmark index with great persistence.

Since a one-year comparison might not tell us much, I decided to dig deeper into my files and see if I could produce evidence to give us a longer-term look. My search uncovered a piece I wrote for the St. Louis Post-Dispatch in early 2008. It discussed the post-award performance of Morningstar's domestic fund manager of the year winners from 2001 and 2002. So I thought I would update that report.

In 2001, Morningstar gave its coveted award for the year's best domestic fund manager to Bill Nygren of the Oakmark Select Fund (OAKLX). How did that fund, a large value fund, perform post-award?

From 2002 through June 2014, OAKLX returned 8.1 percent per year. Over that same period, the large value fund from Dimensional Fund Advisors (DFA)—which is a passively managed structured portfolio—returned 8.8 percent per year. (Full disclosure: My firm, Buckingham, recommends Dimensional funds in constructing client portfolios.)

Thus, post-award, OAKLX underperformed the comparable passively managed fund, DFLVX, by 0.7 percentage points a year.

In 2002, Morningstar gave its domestic fund manager of the year award to Joel Tillinghast of the Fidelity Low-Priced Stock Fund (FLPSX). From 2003 through June 2014, FLPSX returned 13.0 percent per year.

Over the same period, the passively managed structured portfolio of DFA's small value fund returned 13.6 percent a year. Thus, post-award, FLPSX underperformed the comparable passively managed fund, DFSVX, by 0.6 percentage points a year.

While the data provided here is only a small sample, it does seem to indicate that Morningstar's selection of a fund as the best-managed of a given year doesn't provide much insight into its future performance.

Further, Morningstar itself has indicated that the best predictor of future performance is a fund's expense ratio. Keep this in mind the next time Morningstar's annual awards are handed out. It just might prevent you from being a performance chaser.

Larry Swedroe is the director of research for the BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.



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