We've made several changes in our model portfolio to increase our margin of safety amid the market v...
Can 2 New Managers Follow Legends?
09/07/2012 8:15 am EST
It's tough filling a legend's shoes, but someone has to do it...and these two have taken over for a couple of the top fund managers around, notes Russell Kinnel of Morningstar FundInvestor.
Some of the trickiest handoffs in the fund world happen at the retirement of renowned managers who run idiosyncratic strategies that are a manifestation of their personalities.
Not only are the successors filling big shoes, but they also have to decide how much they want to change the strategy in light of investors’ expectations. After all, investors didn’t come to Third Avenue Value (TAVFX) or Columbia Value & Restructuring (UMBX) for plain vanilla. They left the beaten path for managers and strategies that offered a better way.
As fund investors, we must be particularly alert to changes at such funds, while at the same time assessing the abilities of the managers and analysts in charge. Quirky strategies make for quirky returns, and it takes a longer time period to really judge them. Look back over their histories, and you’ll see these funds have gone in and out of favor a few times, even though the long-term returns look appealing.
In June, I moderated a panel of managers running two funds that had recently made the switch. I felt our Analyst Ratings for the funds were validated by what I heard, but with the funds in transition those ratings are hardly carved in stone.
Third Avenue Value
After the panel, the first question I was asked was why we are rating Third Avenue Value Silver in light of weak recent performance. For starters, Third Avenue has built a strong stable of analysts and managers, each of whom apply Marty Whitman’s “safe and cheap” mantra a little differently.
Ian Lapey has worked at Third Avenue for more than a decade, and was named comanager in July 2009. Whitman handed him the wheel in March 2012 when he stepped down from the fund (though not from the firm).
Although he says he plans to continue using Whitman’s strategy, Lapey quickly went to work on what was the fund’s biggest vulnerability. He pared the fund’s huge weighting in Hong Kong real estate names to 39% of assets from 50%.
This makes sense, as defensiveness was one of the fund’s appealing traits. Even if Whitman and Lapey are right about the Hong Kong real estate plays, the bet is outsized and not really consistent with “safe and cheap” from a portfolio perspective.
Ten years ago, the fund had 30% of assets in its top ten holdings, and it spent most of the past decade in the 30s and low 40s before the Hong Kong bet swelled it as high as 71% in 2010.
It’s a welcome change, and we believe the fund still has potential, or we wouldn’t rate it Silver. Lapey is a thoughtful value investor who isn’t likely to follow the crowds, but he has his work cut out for him, as the fund’s shareholder base is losing patience. The fund has seen $530 million in outflows so far this year.
Columbia Value & Restructuring
Guy Pope, who took over Value & Restructuring in May 2012, has built a good record at Columbia Contrarian Core (LCCAX), where he has thumped the S&P 500 since 2005 with a cumulative 57% gain versus 32% for the index. We rate that fund Bronze, but Value & Restructuring rates Neutral because we don’t have a record for this new strategy.
Pope aims to split the difference between his more growth-oriented Contrarian Core strategy and Value & Restructuring’s value-leaning strategy.
Moreover, there doesn’t appear to be much DNA left from retiring manager David Williams. Pope is based in Portland, Oregon, and runs funds with a team of four, while Williams largely worked on his own in Florida. It’s a very different situation from Third Avenue and First Eagle, where the managers were groomed by their predecessors to invest in a similar fashion.
Prior to the May handover, the two funds had no top-ten holdings in common, and it’s hard to imagine Williams going for Apple (AAPL), eBay (EBAY), or Google (GOOG), which are in the top five of Contrarian Core. Both funds are in our large-blend category, but Value & Restructuring leaned to the value side with a smallish $21 billion median market cap, compared with $70 billion for Contrarian Core.
In addition, Contrarian Core ran a 79% turnover rate in 2011, while Value & Restructuring ran 9% turnover. Pope said he and comanager J. Nicholas Smith have a rule that they will trim a position that lagged the benchmark by 15% and review the stock to see whether it still belongs in the portfolio. Thus, they appear to be less patient than Williams.
So we have a good manager, but we don’t know whether this fund will turn into a Contrarian Core clone or something with lower turnover and more value. If Pope is running it more like Value & Restructuring, then the record at Contrarian Core has less meaning. By this time next year, it should be apparent how Pope has adapted his process.
At this point, there are enough unknowns to make this fund Neutral.
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