Can you imagine the Indianapolis Colts hyping season tickets for the upcoming season based upon the success of the team over the last decade with ‘you know who’ under center? Could you picture the Chicago Bulls doing the same after the departure of MJ? How about the Lakers after Magic, the Celtics after Bird, or the Edmonton Oilers after ‘The Great One’ Wayne Gretzky left town?
Sports fans are not stupid. They know that the leader and the team on the field are the keys to future success and that past performance, especially after the departure of the star, is certainly not indicative of future results.
Those investing in mutual funds should make sure they employ the same principle prior to buying tickets—that is, investing—in a fund that may have had significant past success. Why do I raise this topic? Let’s navigate.
In my opinion, the single most important factor to assess prior to investing in a fund is to know the manager. Who is calling the shots? What is this individual’s track record? How long has the manager been running the fund? How strong is his team? I strongly believe that our financial regulators should mandate that these disclosures are highlighted in the marketing materials of all investment funds. If they were we would not have a situation such as that recently highlighted at The Reformed Broker, which wrote, Lying by Ommission: Mutual Funds, Track records, and Departing Managers,
One of the biggest mistakes fund investors make is buying into a track record without realizing that the managers behind that track record are no longer at the helm. Even worse, in many cases new managers come with new investment philosophies and styles – this means that all the previous performance and historical characteristics of the fund’s “behavior” in different market climates should be discarded. But this concept does not get emphasized at the fund ratings firms – investors are left to dig for manager tenure when a simple asterisk next to the historical returns data would suffice.
And in some cases, an old track record is even played up in the marketing – with no (or vague) mention of the fact that this record has become a non sequitur now that someone else is in charge of the fund. I bring this to your attention because there is a very excplicit example of this type of thing occurring right now that all fund investors should be aware of.
I’m sure that Tad Rivelle, CIO of the TCW Total Return Bond Fund (TGLMX), is a nice and handsome man. I’m also sure that he is smart and doing his very best at the helm of the fund. But in my view, he has no business making the following statement in a press release about his fund’s performance:
“Less traditional fixed income asset classes have delivered strong returns for long-term investors and our outstanding track record in the areas of mortgage-backed securities and emerging markets is reflected in these awards.”
This is because Tad and his team had almost nothing to do with delivering these “strong returns” to the “long-term investors” in TCW Total Return Bond.
Before we dig in here, please be aware that I am not making any recommendations for anyone with this post – I’m simply pointing out another dimension of performance research that often gets overlooked by investors who are “chasing the hot dot.” So please don’t act on anything I say here without doing your own homework.
Anyway, the quote above from Mr. Rivelle is about the performance that resulted in the fund company accepting a Lipper Award on March 9th for five- and ten-year performance. The problem with this – and the thing that investors need to know – is that these award-winning results were actually generated by Jeffrey Gundlach and his team, about 30 of whom departed TCW in December of 2009. Anyone who had been given trading authority by Gundlach or had worked closely with him, learning his process, has already followed him to his new shop, DoubleLine.
Think that Andrew Luck or RG III or whomever the next QB for the Colts might be would be so brash as to hype the success of the Colts while Peyton Manning led the team? Clearly not. In the same fashion, make sure you know who is ‘calling the shots’ before you put your money to work in any fund.