Should you bet on fund world’s award winners?

January 22, 2014 

They announced the Oscar nominees last week, right around the time when the winners of Morningstar’s annual Manager of the Year Awards were being crowned.

There are a surprising number of similarities between the biggest award in the fund world and the biggest trophy in films; understanding those parallels and the value of the investing trophies is why it’s worth comparing the two awards.

First, however, Morningstar’s winners:

The Domestic-Stock Fund Manager of the Year for 2013 was Dennis Lynch and the growth management team at Morgan Stanley, which oversees Morgan Stanley Focus Growth (AMOAX), Institutional Growth (MSEQX), Institutional Mid Cap Growth (MPEGX), and Institutional Small Company Growth (MSSGX). The International-Stock Fund Manager of 2013 was David Samra and Daniel O’Keefe from Artisan International Value (ARTKX), and Fixed-Income Manager of the Year honors went to Daniel Ivascyn and Alfred Murata from PIMCO Income (PIMIX).

In Morningstar’s lesser categories, Steven Romick, Mark Landecker and Brian Selmo from FPA Crescent (FPACX) were named Allocation Fund Manager of the Year, with Brian Hurst and Yao Hua Ooi from AQR Managed Futures (AQMIX) tagged as Alternatives Fund Manager of the Year.

Chicago-based Morningstar released its nominees for each category about a week before bestowing the honors; fund managers would be just like Oscar contenders to say it’s an honor just to be nominated, and would note that they mostly want to do good work, with prizes being a bonus.

Another key similarity here is that the public sees the award winners and assumes their next performance will live up to the one that put them in the spotlight.

That seldom happens in movies or money. Few Oscar winners go back to back, and few top managers stay at the head of the class indefinitely. Plenty of actors who gain nominations or even win the golden statuette have filmographies filled mostly with the mediocre or ordinary.

More important is the reaction of the fans. Just as people hear about a movie, are attracted by the buzz, impressed by the stars and then sometimes disappointed by what they see on the screen, many fund investors are lured to funds by ratings and awards, only to be disappointed by future results.

That should not be a surprise. The Morningstar awards — in fact, any honors made up by the research and data firms that follow the investing world — are all bestowed for past performance and are not really predictive of the future, any more than an Oscar nod means the actor’s next flick will be great.

That said, there were rumors of a Morningstar jinx — where earning the prize led to sour performance — though Morningstar’s own research has not only disproved that idea, but has shown that winners tend to be good long-term buys.

But the crux of that research shows that the winning managers wind up being good long-term bets, even if they are hit-or-miss in the immediate aftermath of their win.

Just as star actors can be stuck with bad scripts, poor direction and lousy films, star managers can be stuck with the wrong strategy or investment objective in bad market conditions.

Award winners are both a beneficiary and a victim of circumstance. Many have taken the proverbial “tough script,” making unpopular bets that made them a little harder to own in, say, 2011 or ’12, and only had those wagers pay off in 2013.

That’s also why it’s no surprise if a fund doesn’t shine after winning its award, as management styles can fall out of favor as quickly as they go in.

What’s more, if you don’t already own the funds that won the awards or earned the nominations, all that matters is what happens next. Buy the fund on the award buzz and you’re already well into a cycle that favors the fund, which means you may be closer to when the market turns and things just don’t look as good.

With that in mind, what investors should take from awards such as Morningstar’s is the methodology that goes into picking winners.

In Morningstar’s case, the managers of the year run funds that get top ratings from the agency that have produced strong long-term results without taking on excessive risks, and they need to exemplify good stewardship. In addition, while the trophy is bestowed for one year, Morningstar does evaluate the manager’s body of work, which is important in finding someone who has the ability to have more than just one great year.

In the end, what you mostly want to know about your funds is that they have the ability to contend for awards, that they don’t take untoward risks, that they have a clear strategy and will stick with it in all conditions and more.

Find the right characteristics in a manager and/or strategy and methodology and you’ve got a winner, even if that fund never wins a trophy.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@ MarketWatch.com or at Box 70, Cohasset, MA 02025-0070.

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