TheStreet.com Ratings: Betting On a New Manager

Richard Widows

Until the biotech industry concocts a remedy, only one buffer currently stands between the ardent sports fan and a complete nervous breakdown resulting from withdrawal after the last whistle of the final playoff game. It's the inevitable week or two of musical chairs as the coaches of losing teams are ritualistically axed and replaced by coaches who happen to be, as the cliché goes, "ready for new challenges."

The sport of mutual fund investing isn't all that different.

The logic of team owners seems to be that it makes more sense to fire one head coach rather than the complete roster of players. Similarly, mutual fund management firms sometimes appear to be driven by the logic that replacing a fund manager is easier than admitting that all the investments in the fund are wrong.

However, just as replacing a coach is no guarantee of a quick Super Bowl trophy, changing fund managers is unlikely to catapult shareholders onto Forbes' list of billionaires. To put this theory to the test, we screened open-end funds with low ratings scores that experienced a turnover during the last three months of 2005 -- an admittedly arbitrary time period -- to see whether any upgrades resulted.

Of course, there's no way of knowing whether the funds' ratings had anything to do with the change in management. But the turnover provides an opportunity to test the efficacy of changing managers, regardless of why it occurred.

Nineteen funds with TSC Ratings grades in the "D" and "E" ranges -- which equate with "sell" recommendations -- when new managers were installed late in 2005 were tracked through the end of February 2007. The logic used was that a new manager most likely needs some time to devise a strategy, clean out the old holdings and replace them with new investments. We then assumed that a year was a reasonable period for the new leadership to affect TSC Ratings grades.

The results, as summarized in the accompanying table, were not overwhelmingly encouraging. Only five of the 19 funds climbed from "sell" to "hold" territory, which was accomplished by elevating their grades to the "C" range. None jumped to the "A" or "B" ranges, which correspond to a "buy" recommendation.

Still Plenty of Room for Improvement Management changes in late 2005 have yet to boost the scores of these funds
NAME	TICKER	NEW MANAGER START DATE	SEPT. 2005 TSC RATINGS GRADE	FEB. 2007 TSC RATINGS GRADE	12-MO. TOTAL RET'N (%) *
Dreyfus Premier Third Century A	DTCAX	12/1/2005	E	D	7.09
Dreyfus Socially Resp Growth S		12/1/2005	D	D+	7.26
Eaton Vance NY Muni A	ETNYX	11/1/2005	D	C	6.17
Fidelity Adv Biotechnology A	FBTAX	10/12/2005	E+	E-	-6.33
Fidelity Adv Growth & Income A	FGIRX	10/31/2005	D-	D+	9.18
Fidelity Adv Large Cap Fund A	FALAX	10/31/2005	D-	C-	10.51
Fidelity Growth & Income	FGRIX	10/31/2005	D-	E+	8.89
Fidelity Magellan Fund	FMAGX	10/31/2005	E+	E	5.10
Fidelity Select Biotech Port	FBIOX	10/12/2005	E+	E-	-6.13
Hallmark Capital Appreciation R	HCARX	12/31/2005	E-	E+	8.08
Hartford Stock C	HSFCX	11/1/2005	D+	C	9.59
ING Index Plus LargeCap Equity Fd A	NPPAX	12/1/2005	D-	D+	7.23
MFS Growth Opportunities Fund A	MGOFX	12/6/2005	E+	D-	2.85
MFS Mass Investors Gr Stk B	MIGBX	12/6/2005	E+	D	3.16
MFS Strategic Growth Fund 529A	EASGX	12/6/2005	E+	E+	3.27
PIMCO CA Interm Muni Bond A	PCMBX	10/1/2005	D-	D+	4.31
Principal Inv SmCp Gr Fd AdvPfd		11/15/2005	D+	C-	4.08
Seligman Income & Growth A	SINFX	10/1/2005	D+	C	13.98
Sequoia Fund	SEQUX	11/25/2005	E	D-	9.31
INDICES
S&P 500 Composite Total Return					11.97
S&P 400 Midcap Total Return					9.68
Russell 2000 Index (Small Cap)					9.85
Lehman Brothers Municipals					4.97
* Through 2/28/2007. Source: TheStreet.com Ratings

The new managers all had between two and five months to rearrange holdings and implement new strategies before the start of the 12-month period used to measure their performance from February 2006 through February 2007. Yet only one of the 17 equity funds outperformed the total return of the S&P 500 during that time. The two new biotech managers failed to inject enough stimulants into their funds to pull their performance out of negative territory and 12 of the other equity funds managed only single-digit returns for the period.

The two municipal bond funds fared better; the (ETNYX)Eaton Vance New York Muni Fund (ETNYX) handily outdistanced the Lehman Brothers Muni index for the period, while the performance of the (PCMBX)PIMCO California Intermediate Muni Bond Fund (PCMBX) fell just short of this gauge.

While this class hasn't had much success to date, there's still a revolving door for fund managers. The table below lists management changes between November 2006 and January 2007 for funds that were in "sell" territory, as measured by their TSC Ratings grades, at the time of the changes.

Starting With a Clean State Funds with recent manager changes
FUND	TICKER	MANAGER START DATE	PREV. TSC GRADE*	2/28/2007 TSC GRADE	YEAR- TO-DATE RET'N (%)**
Tocqueville Small Cap Val Fund	TSCVX	1/1/2007	E-	E-	2.30
STI Classic Lrg Cap Quant Eqty A	SQEAX	12/4/2006	D+	D+	1.25
Northern Trust US Govt	NOUGX	11/1/2006	D-	D-	1.12
Northern Trust Short-Int U.S. Govt	NSIUX	11/1/2006	D	D+	1.01
Northern Trust Midcap Growth	NOMCX	11/1/2006	D-	D	3.62
Northern Instl Mid Cap Growth A	BMGRX	11/6/2006	D-	D	3.52
Legg Mason Prt Social Awareness A	SSIAX	12/28/2006	D-	D-	-0.77
Gartmore Glbl Health Sci A	GLSAX	11/6/2006	D-	E+	1.18
Fidelity Fifty Fund	FFTYX	11/9/2006	D	C-	2.07
Fidelity Blue Chip Growth	FBGRX	11/9/2006	D	D	-0.97
Fidelity Adv Equity Growth A	EPGAX	11/9/2006	D-	E	0.39
Columbia Core Bond Fund A	LQPAX	11/27/2006	E-	E-	1.43
Columbia Asset Allocation Fund A	LAAAX	11/1/2006	D+	D+	0.89
American Century CA Lg Term T/F	BCLTX	1/1/2007	D	C+	1.14
COMPARATIVE INDICES
Lehman Brothers Aggregate Bond					1.50
Russell 2000 Index (Small Cap)					0.87
S&P 500 Composite Total Return					-0.47
S&P 400 Midcap Total Return					4.39
* TheStreet.com Ratings grade at time of manager change. ** Through 2/28/2007. Source: TheStreet.com Ratings

While it may be too early to draw any conclusions, the early indications from the newer crop of managers are encouraging. All but two of the equity funds have outperformed the S&P 500 so far this year. In fact, (FFTYX)Fidelity Fifty Fund's (FFTYX) Peter Saperstone has edged his fund from a "D" when he took the helm to a "C-minus" that equates with a "hold" recommendation.

But the best performance so far by a relief pitcher is Christopher Guinther's; he's added 3.52% to the value of the (BMGRX)Northern Institutional Mid Cap Growth Fund (BMGRX) during the opening stretch of 2007.

And while none of the four bond funds has matched the performance of the performance of the Lehman Brothers Aggregate Bond Index, Dave MacEwen of the (BCLTX)American Century California Long-Term Tax Free Bond Fund (BCLTX) has elevated his fund to a "C-plus" grade, which elevates it to "hold" status.

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