(PUB) Morningstar FundInvestor

2

Data as of April 2013.

All Funds 2002

All Funds 2007

p Changes Next Five Years

p Changes Next Five Years

3.34

3.00

2.34

2.05

2.03

1.83

1.56

1.53

1.10

1.04

>3

>3

0 1 Number of departures prior five years 2

3

0 1 Number of departures prior five years 2

3

Performance as a Predictor of Manager Changes 2002

Performance as a Predictor of Manager Changes 2007

p Subsequent Manager Changes

p Subsequent Manager Changes

2.08

1.94

1.73

1.70

1.70

1.64

1.40

1.38

1st Quartile

2nd Quartile 3rd Quartile

4th Quartile

1st Quartile

2nd Quartile 3rd Quartile

4th Quartile

wouldn’t follow the pattern. At some firms, muni man- agers have a more team-oriented process and the named manager may switch from one fund to another without much upset. However, I don’t know whether the practice is widespread enough to be an explana- tion. Certainly there are fewer dramatic ups and downs in performance in munis. Maybe that means less turbulence in the manager’s suite. Let’s look at the results for all funds. In the 2002 test, funds with no change in the prior five years experi- enced 1 . 1 departures on average in the next five years. That was followed by 1 . 53 for one departure, 1 . 83 for two departures, 2 . 34 for three departures, and 3 . 00 for more than three departures. For the 2007 test, we saw 1 . 04 departures on average for the no-depar- tures group, then 1 . 56 departures, 2 . 03 departures, and 3 . 34 departures for the last group. In sum, the more recent departures a fund has end- ured, the more likely it is to have many in the coming years. If you want stability, then check the record of past manager departures. On the one-page fund

reports you see on pages 4 – 7 and in mfi.morningstar. com , past manager changes are marked in the returns graph with a triangle. What About Past Returns? That’s a question I asked as I was running the above data. I wondered whether funds with bad perform- ance were even more likely to make changes than funds with past manager departures. So, I set up a similar test, only this time I used past performance over the trailing five years. The answer—yes, there is a slight link between per- formance and departures. It is not nearly as strong as past manager departures, though. For 2007 , funds in the top-performing quartile saw 1 . 4 manager departures on average in the ensuing five years. Funds in the second quartile saw 1 . 73 departures on ave- rage, while third-quartile funds saw 1 . 94 departures on average. Bottom-quartile funds saw 2 . 08 man- ager departures on average.