(PUB) Morningstar FundInvestor

August 2 014

Morningstar FundInvestor

11

Have Investors Noticed These Manager Changes? Red Flags | Dan Culloton

As of mid- 2014 , Ivy High Income WHIAX was still raking in the inflows even though much of the management team responsible for its strong histo- rical results are gone. The fund, whose one-, three-, five-, and 10 -year trailing returns are each in the top fourth of the high-yield category, had attracted more than $1 billion in inflows this year through June 30 . However, we rate it Neutral because the fund has had two manager changes in less than a year. Advisor Waddell & Reed fired manager William Nelson, who had been with the firm for nearly 20 years, for reasons unrelated to portfolio management in July. The action came just eight months after Nelson replaced former lead manager Bryan Krug when he left for Artisan Partners in November 2013 . Chad Gunther, an 11 -year veteran at Waddell & Reed who was previously an assistant manager of the fund, has stepped up and is familiar with the fund’s pro- cess, but that’s a lot of change for a hot-performing, now nearly $12 billion fund in a frothy asset class that already had thin analytical support. Color us wary. T. Rowe Price Global Technology PRGTX has steadily gathered assets in recent years and put up respectable results while seeing a lot of manager changes. Joshua Spencer has run the fund for about two years. He replaced David Eiswert in 2012 , who replaced Jeff Rottinghaus in October 2008 , who had himself replaced Robert Gensler in 2006 . Like his predecessors, Spencer came from T. Rowe’s analyst staff, where he covered technology stocks. Indeed, you have to have a lot of confidence in T. Rowe’s analysts to invest here because every couple of years a new one has been allowed to run it. Returns have held up through all the changes; results remain in or near the peer group’s top decile over all trailing periods. But this fund, with its fairly concentrated port- folio that keeps 47% of assets in its top 10 and a nearly 30% stake in overseas stocks, is not exactly an easy fund to run. It would be easier to believe in it if a more experienced hand were at the helm. œ Contact Dan Culloton at dan.culloton@morningstar.com

Know what you own. It’s one of the first lessons of investing. It follows that you shouldn’t just buy a fund’s track record. Before investing, you should make sure the manager or managers who own those results are still on the job. Here are some funds with decent past performance and recent inflows but managers who haven’t been around for very long. Are new investors getting what they expect from these funds? We shall see. Vanguard Precious Metals and Mining ’s VGPMX unique approach gives it an attractive risk profile in the volatile equity precious-metals category. That has drawn investors after three harrowing calendar years. The fund has seen slightly positive flows this year— $64 million—after bleeding $209 million in the three- year period ended in June. Investors buying now, however, should realize the manager who built much of the fund’s long-term record, Graham French, is gone and lead portfolio manager Randeep Somel has been on the job for only a year. Furthermore, Jamie Horvat, who joined him as a listed manager in early 2014 , has been with subadvisor M & G for about a year. Somel worked with French for about eight years, and Horvat arrived from another precious-metals boutique. The fund also continues to define its invest- ment universe more broadly than peers, including a wider variety of metals and materials stocks. The fund still gets a Morningstar Analyst Rating of Neutral because of the recent manager changes.

What is Red Flags? Red Flags is designed to alert you to funds’ hidden risks. Such risks can take many forms, including asset bloat, the depar- ture of a solid manager, or a focus on an overhyped asset class. Not every fund featured in Red Flags is a sell, and in fact, some are good long-term hold- ings. But investors should be prepared for a potentially bum- pier ride in the near future.

New Managers’ Big Inflows

Manager Tenure (Yr)

Morningstar Analyst Rating

Name

Net Flow 1 Yr ($) Net Flow YTD ($)

Ivy High Income WHIAX

3,002,481,931 1,176,505,026

0.08 Ø

T. Rowe Price Global Technology PRGTX

158,561,696 96,698,677

2.17

Vanguard Precious Metals and Mining VGPMX

82,116,421

64,461,860

0.88

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