Fund and returns earned by their investors tend to suffer after peak performance.
Around this time every year Morningstar releases its selection for the top mutual fund managers of the past year.
Being selected for this honor though may bring investors something similar to the John Madden curse which is believed to impact the performance in the following season of the athlete chosen to appear as the face of the famous video game series.
The Morningstar curse however isn’t necessarily simply on the fund manager who wins, losing years do seem to be a trend with recent winners within the first few years following the award, but they have as many repeat exceptional performances as well.
No, the more certain curse in this case applies not to the mutual fund as much as to the individual investors who decide to jump ship from other funds to the new top skipper.
Below I look at past fund winners, and their total fund returns, as well as Investor Returns. This measurement, more commonly known as Dollar Weighted Returns, reports the performance that the average fund investor received on their investment in the fund. The difference being based on investment flows into and out of the fund that happened over time.
As seems to be the case with many past funds, investors who jump into these funds after their award winning finish appear to have been cursed. Many piled in after the good years, only to shortly after absorb underperforming years, often finishing among the worst of the category.
2006 - O. Mason Hawkins and Staley Cates, Longleaf Partners (LLPFX) & Longleaf Partners Small-Cap (LLSCX). Partners did not handle the 2007 & 2008 downturn in the year following their award well. In both years the fund ended in the bottom 10% of category peers. It did came back with stellar years in 2009 & 2010, but those who invested at the high would be set back for some time. The Small-Cap fund is a go-anywhere fund that has held several top 10% rankings against several categories since the award, which makes it difficult to compare to one simple category. As will be a reoccurring theme, like many funds below Small-Cap continued its hot streak the year following, only to have a dismal year (bottom 10%) in the next year (2008).
How did investors do? Investor Returns in the Small-Cap fund have been solid, and the Partners fund record for investors over the last five years also has been great, but extending out to the ten year number investors have performed poorly (it’s ten year Investor Return rank in category puts it in the bottom 29%). Given that the good five years are included in the ten year number, investors clearly performed very badly around the time of the Morningstar award.
2007 – William Danoff, Fidelity Contrafund (FCNTX) & Fidelity Advisor New Insights (FNIAX). I’ll focus on the more popular Contrafund as Investor Returns are not available for Advisor New Insights. While the Contrafund has ranked in the top half Large Growth funds and consistently appears to add value (though it is mainly currently invested in Large Growth stocks, this is a fund that can and does invest outside of this category which like Longleaf makes it difficult to compare directly) we see a similar outperformance in the year following the award, and a dip in the next year. Overall performance over five years since the award has been mediocre with the fund hovering around the middle of the pack of its category peers.
How did investors do? Surprisingly well since the award, though they trail prior to it. Overall the last five years investors achieved just about the same return as the fund, though they still trail the returns of those that bought and held.
2008 – Charlie Dreifus, Royce Special Equity (RYSEX). As a fund, Royce Special Equity for the five year period from 2008 – 2013 trailed the Small Blend category by 2.31 percentage points annually, and has been in the bottom 20% of funds. This includes the award winning year of 2008 which is telling about the returns over much of the rest of the period.
How did investors do? Five year Investor Return rank in category is in the bottom 18% of funds with investors trailing by about 1.5 percentage points per year.
2009 – Bruce Berkowitz, Fairholme Fund (FAIRX). This fund has posted solid returns versus its Morningstar category in most years. Interestingly, the year following its award it was the best fund in the category, and the year after that it was the worst fund.
How did investors do? Over the last three years, they are in the absolute bottom few funds with a -1.11% return compared to the fund which did 7.55%.
2010 – Bob Goldfarb and David Poppe, Sequia (SEQUX). Sequia is another fund that posted a solid first place in the year following its selection, and has been about middle of the road since. The fund invests all over the large cap universe and holds a significant amount of international equities, so it is difficult to simply compare it to a category. Sequia was closed to new investors for 25 years, so investors did not have much of a chance to swing in and out and Morningstar does not track their Investor Returns.
2011 - Scott Satterwhite, James Kieffer, and George Sertl, Artisan Mid Cap Value (ARTQX), Artisan Value (ARTLX), Artisan Small Cap Value (ARTVX). Since Morningstar does not publish investor returns for these either funds I can’t say if investors followed the curse, but if they did they are regretting it. The two years since winning have not been kind to these funds; the Small Cap Value fund finished in the bottom 10% in both years, and performance at the other two funds has been very poor on the whole.
There it is, the Morningstar curse on investors who follow the manager of the year winners after their good years. While the time period for all of these managers is too short to judge them, and they have solid track records before the awards, investors should avoid seeing this award for anything but what it is – a job well done for investors over the past year, not a prediction for future performance.