(PUB) Investing 2015

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Where Fund Companies Will Try to Spin You The Contrarian | Russel Kinnel

Another game some fund companies play is keeping a figurehead manager named to a fund long after he has stopped having day-to-day management responsibilities. This move enables management to lay claim to a longer record and to boost their statistics for average and median manager tenure. Franklin Templeton seems inclined to do the latter. It has listed Rupert Johnson as comanager on Franklin DynaTech FKDNX since 1968 . Jerry Palmieri remained a listed manager on Franklin Growth FKGRX from 1965 until his death in April 2014 at the age of 85 . There are two checks on fund companies’ attempts to spin management. The first is that the prospectus filed each year lists managers. So, fund companies may try but are usually not successful in backdating manager tenures because one can go back to the prospectus and see when a manager was first listed. Second, the SEC states that listed managers must have day-to-day responsibility for a fund, so fund companies are not acting in the spirit of the rule when they include managers who no longer have day-to-day responsibilities. However, the SEC hasn’t gone after any firms for playing fast and loose with this rule. We talk with fund managers regularly and save our notes that show analysts and managers on the team. These help us to keep fund companies honest. When analyzing a fund, we base its rating on who we understand is really running it. Manager tenure is one thing you don’t want to take at face value from fund companies, so check a fund’s Morningstar Analyst Report, particularly around a manager change when spinning is at its peak. œ

Looking at the manager biographies for American Century Small Cap Value ASVIX , I saw something odd. Morningstar listed Steven Roth as a manager from 2006 to 2008 , but his bio supplied by current employer Dean Capital Management said he was a manager from 2004 to 2008 . (We’ve corrected that bio to have the correct dates.) No doubt Roth’s current employer wants to make him look experienced to potential investors in Dean Small Cap Value DASCX . It’s not uncommon in the fund world for firms to do some spinning of manager experience. It’s the area investors should be most skeptical about when it comes to funds. It’s very hard and very rare for firms to try to lie about performance or holdings, as they have to report daily returns and portfolios are held by third-party custodians and audited by outside auditors. That makes it quite difficult to do anything deceptive; these are also areas where the SEC will come down on fund companies like a ton of bricks for any shenanigans. However, management is more of a gray area, and the SEC has shown little interest in drawing sharp lines. Most of the spin comes in comments rather than in black and white. If a manager leaves a successful fund, the firm may emphasize how much remaining team members contributed and how it’s really about the process. Some may go so far as to say, “Joe Smith was really managing the fund, and Jane Doe had little to do with it.” Which raises the question, were they lying before when they said Jane Doe was manager or are they lying now? On the other hand, if a fund performed poorly, the firm may try to dump all the poor performance on the departed manager even if the new manager was part of the same team.

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.