Over the last decade, retail investors have been aggressively yanking their cash out of mutual funds, as they’ve realised that too often they’re paying too much in fees to managers that provide very little in the way of extra return.
Between ETFs and passive index funds, and DIY diversification, people see less and less of a need to play the mutual fund game.
But the racket doesn’t just stop at high fees and index huggers.
Josh Brown (The Reformed Broker) had a great post up this week titled: Lying By Omission: Mutual Funds, Track Records and Departing Managers.
He starts off with a great intro about how nobody bought the last Guns ‘n’ Roses album, because everyone knew that while it was technically a Guns ‘n’ Roses album, the only original member was Axl Rose, and that really it wasn’t the same band.
It turns out, that phenomenon happens in the fund industry as well.
The nut of the piece is this. The CIO of the TCW Total Return Bond Fund recently accepted an award for the long-term performance of said fund despite the fact that he only took over the fund a couple of years ago, when superstar bond manager Jeff Gundlach was fired from TCW (before starting his own fund family at DoubleLine).
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.
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 10-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.
Any reader of this site knows that Gundlach has continued to kill it at DoubleLine, whereas on the other hand, TGLMX’s recent performance hasn’t been so hot.
Here’s a chart that’s roughly the 2011 performance of TGLMX vs. some benchmarks. It’s lagged badly, and according to Josh, it was only in the 14th percentile of its family.
Conversely, here’s DoubleLine (where Gundlach is at now) over roughly the same period, against similar benchmarks.
Anyway, this is part of the business. There is management turnover, and as Josh points out, there are examples of new managers taking over a fund, and it working out very nicely.
But in theory, the performance of any fund is really about the performance of a manger. And investors in funds would be advised to pay attention to whether a manger accepting an award or touting a specific performance actually is the manager who achieved that.