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
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.
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
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
Eaton Vance New York Muni Fund (ETNYX) handily outdistanced the Lehman Brothers Muni index for the period, while the performance of the
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.
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,
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
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
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.
As originally published, this story contained an error. Please see
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Richard Widows is a financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.