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Are These Three 'In Transition' Funds in Your Portfolio?


Just like stock investors need to regularly re-examine their holdings, so too do fund investors need to stay abreast of performance issues and manager changes at their funds.

Even the best mutual funds aren't immune from the occasional slump. Of the 108 funds in the Morningstar 500 that are in the top decile of their respective categories over the past decade, 32 currently land in the bottom half of those same groups during the trailing 36-month period. Like a baseball manager looking to his bullpen for relief, shareholders may be staring at those bottom-half showings and wondering whether it's time to go with another fund.

Is that the right call? Certainly a lull in returns is worthy of scrutiny. In some cases, patience is required. Indeed, even top managers are prone to a bad year or two. Investors fled Fairholme (MUTF:FAIRX) in 2011 when it lost a staggering 32% as top holdings like American International Group (NYSE:AIG) floundered.

This year, however, it is back atop the large-value group, and its longer-term record remains topnotch. But a drop-off in performance can be notable for other, more disconcerting reasons than an out-of-favor style, for example.

Execution problems, a change in strategy, or the departure of a manager all provide good reason to re-examine your fundamental case for a fund. Those situations increase the uncertainty a fund can pull itself out of the doldrums. Below we take a look at three funds in the Morningstar 500 that are enduring just such situations.


Ken Heebner is something of a gunslinger. Over the past five years, he has averaged over 400% turnover in a concentrated portfolio of around 25 stocks. Heebner has had his fair share of successes, such as in 2007 when his energy and emerging markets picks drove the fund to a whopping 80% gain. But the past two years show how difficult it can be to consistently execute this strategy.

The fund lost 26% last year, and its 9% year-to-date gain through November 30, 2012, trails the average large-growth peer by almost 6 percentage points. A disappointing level of transparency makes it difficult to know what the fund owns at any one time, or why. On top of that, Heebner recently turned 71, which heightens key-man risk. It's hard to justify a long-term commitment here.

Columbia Value & Restructuring (MUTF:UMBIX)

David Williams keenly guided this fund for 20 years before handing the reins to his two co-managers, Guy Pope and Nick Smith, in April 2012. Williams employed a contrarian strategy that focused on companies that were in turnaround mode. The co-managers, who worked closely with him for three years, don't plan to change much, but they've got their work cut out for them.

The fund has gained 12.6% this year through November 30, 2012, which is good on an absolute basis. But the fund still landed in the bottom half of the category during that time period, a disappointing showing after a poor 2011. On top of that, it has recently endured heavy redemptions. Sometimes a red flag turns out to be a yellow one upon closer inspection, as may be the case here. But the co-managers need to prove they can succeed without Williams.

Janus Contrarian (MUTF:JSVAX)

A manager change is also at the root of concern at this fund. Long-time manager David Decker posted an impressive long-term record here but left in mid- 2011 to start his own firm amidst a slide in the fund's category rankings that included a big 48% loss in 2008. The fund is now run by his protégé, Dan Kozlowski, who has kept its value tilt but has emphasized less-risky companies with cleaner balance sheets while cutting back on foreign stocks. Kozlowski got off to a rough start late last year, but the fund's 18% gain in 2012 through November 30, 2012, lands it in the top decile of the large-blend peer group. Nevertheless, a return to glory here is uncertain.

Editor's Note: This article was written by Rob Wherry of Morningstar FundInvestor.

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