Of Mutual Interest Fund manager experience: How much does it count?

By Mark Jewell

AP Personal Finance Writer

BOSTON (AP) -- You want an experienced pilot when you board an airplane. The stakes aren't so high with mutual funds. But good stewardship of your savings can go a long way to strengthen financial security.

The value you get from a fund run by an investment pro should more than offset the buck or two paid in fees for every $100 invested. It's hardly trivial, because those annual fees may cancel out whatever market-beating gains the manager delivers compared with cheaper index funds.

So don't settle for managers whose investment records and credentials don't justify what they're charging.

The trick is knowing how to assess those traits. The first is relatively easy, because performance is easily measured. Compare investment returns at the manager's fund with those of funds with similar objectives.

Assessing a manager's resume is tougher. Should a 10-year assignment as an analyst researching investment options count as much as a 5-year run as a fund manager with final say over what to buy and sell? With the 2008 meltdown fresh in mind, many investors want managers who succeeded at limiting losses. So should you avoid those whose records don't extend back to periods of sharp market downturns?

There are no easy answers. But if you believe wisdom comes only from experience, it's worth considering longtime managers whose records suggest they know what they're doing.

One is Bernard Klawans. He's run Valley Forge Fund (VAFGX) since its launch in 1972. Klawans added a co-manager a couple years ago, but the 89-year old says he has no plans to step down soon.

"My mind is still pretty good, even if I have slowed a bit physically," says Klawans, who nevertheless continues his hobby racing dinghy sailboats.

Valley Forge is a small fund with $26 million in assets, and 5-star ratings from fund trackers Morningstar and Standard & Poor's. Over the past three years, the fund's average annualized return of 7.4 percent ranks in the top 1 percent of large-value funds. Go back 10 years, and Valley Forge ranks in the top 6 percent.

"I'm conservative. I don't want to go to the moon every day," says Klawans, a former engineer in General Electric's space division who started the fund out of his Wayne, Pa. home, which continues to serve as the fund's headquarters.

He's managed to make smart moves when he believed the stock market had risen to unsustainable levels. While most mutual funds lost around 40 percent in 2008, Valley Forge gave up 20 percent. Rather than stay fully invested, Klawans kept as much as two-thirds of his portfolio in cash. He also built similar cushions during market declines in the 1970s and 1980s.

He focuses on dividend-paying stocks of large companies, like current top holdings GE and oil company ConocoPhillips. Thanks to their typically steady returns, $25,000 that Klawans personally invested in his fund 37 years ago has grown to $1.4 million.

"My fund is for widows, orphans and me," he says.

Below are three stock funds identified by S&P whose managers have remained with the fund for at least 25 years. Each currently gets five stars from S&P, whose ratings emphasize a fund's holdings, and S&P analysts' assessment of those stocks.

-- Meridian Growth (MERDX), run since its 1984 launch by Richard Aster Jr. William Tao joined as co-manager in 2007.

-- Nicholas Fund (NICSX), managed by Albert Nicholas since its 1969 inception.

-- Parnassus Fund (PARNX), run by Jerome Dodson since its launch in 1984.

Despite these managers' successes, the duration of a manager's tenure is one among many factors to consider in selecting a fund. Here are four key considerations for assessing manager experience:

Maintain your perspective: There aren't any rules to dictate how much weight you should give to a manager's tenure versus other considerations. A recent Morningstar study found that management is one of the three key factors useful in predicting a fund's performance. The other two: low expenses, and high marks from Morningstar's fund-rating system. That system evaluates factors including past returns, and how much investment risk a fund takes on.

Think broadly: Assessing a single manager is relatively simple. The process gets complicated with funds run by co-managers or teams of as many as a dozen. One approach: Examine the fund's record since the longest-tenured manager started, and compare returns over that period with those of other funds in the same investment category.

Also, remember that managers are backed by a fund company. Your fees pay for everyone from analysts, to staff answering the phones. The company may also have a strong or weak reputation for acting in investors' interests, whether it's from the fees charged to the independence of boards that oversee funds. One assessment tool: "stewardship" ratings that Morningstar uses to grade fund companies.

Assess resumes carefully. Typically, fund managers are chartered financial analysts, a professional designation certifying investment expertise. Check fund materials for the manager's resume -- the fund prospectus is a good place to look. A CFA designation is a plus, along with degrees from a top business school.

Avoid funds with high manager turnover: S&P fund analyst Todd Rosenbluth says any fund that's seen turnover within the past three years is worthy of close examination: Was it an orderly changing of the guard, or an attempt to clean house after a streak of lousy performance?

A manager doesn't need to stick around for decades. Typically, though, fund companies let managers stay a long time because they've proved their worth. A newcomer brings uncertainty.

"They might trade the holdings the old manager liked," Rosenbluth says, "and what made the fund appealing in the past might not be there anymore."

Published: Wed, Feb 23, 2011