An actively managed mutual fund is only as good as its fund manager. Many investors will invest money in a mutual fund based merely on the Morningstar rating, the fund's recent performance, or simply because it is the only choice in their retirement plan.
One of the most important metrics that investors will either overlook or may not even consider is who the fund manager is, or their tenure at the fund. Oftentimes, the ratings and market-beating performance was earned by a fund manager, only to be replaced by another team who runs the fund into mediocrity. This is also the story of the Columbia Diversified Equity Income Fund (MUTF:INDZX), (MUTF:RDEIX), (MUTF:RDERX), (MUTF:RSEDX), (MUTF:CDVZX).
This fund started out as an IDS fund, which became part of American Express (NYSE:AXP). It was later rebranded into RiverSource when American Express Financial Advisors was spun off as Ameriprise (AMPF). After Ameriprise acquired Columbia, this fund was rebranded under the Columbia Threadneedle umbrella.
I was first introduced to this fund in 2005 when I started my career as a financial advisor at Ameriprise/American Express Financial Advisors. It was run by a terrific fund manager and his team, providing market-beating performance, and was rated well for the performance by Morningstar and Lipper. Years have passed, fund management has changed and unfortunately the current fund managers have not lived up to the previous glory.
This article is written for those investors in the fund who are looking for a reason for the recent performance and a lesson for mutual fund investors to pay attention to who manages the fund. Let's take a look at the fund.
Sponsor: Columbia Threadneedle Investments
- Managers: Hugh H. Mullin (7/2013), Russell T. Bloomfield (10/2013)
- AUM: $2.376 Billion across share classes
- Historical Style: Large Cap Value
- Investment Objectives: High level of current income and capital growth
- Number of Holdings: 75
- Current Yield: 1.35%, Annual Distributions
- Inception Date: 10-15-1990
- Fees: A Share: 1.03%, C Share: 1.78%, Z Share: .78% (Net Expenses)
When I first learned about the fund, the two main themes were "deep value" and "global infrastructure." This fund along with a few others were run by RiverSource's Deep Value/Contrarian Equity team. The fund in its current form seeks to generate alpha through the following strategy.
1. The fund will invest in dividend paying and other value-oriented stocks that the team believes are positioned to outperform going forward.
2. We employ a value-oriented investment philosophy that seeks to identify opportunities where investors are misperceiving a company's prospects, which in effect, creates a dislocation in price.
3. In addition to leveraging a team of experienced analysts, the investment team conducts rigorous fundamental and systematic research to understand a company's outlook and opportunity.
Like my recent article about the American Funds' The Growth Fund of America (MUTF:AGTHX), this is a tale of two cities. Unlike in that article where the central focus was the large size of the fund, here the story centers around a departure of a key manager.
Fund manager Warren Spitz took over the fund late in 2000 and together with his team ran the fund through late 2009.
During Warren Spitz's tenure, the fund not only outperformed the S&P 500, but also the Russell 1000 Value, the fund's benchmark. Even though the fund took quite a tumble in 2008 as most of value type investments tend to do, it continued to outperform during the rebound.
Quite clearly, Warren Spitz and the fund were delivering alpha to the shareholders.
After his departure from the fund in 2009, it continued to be managed by the remainder of his team until 2013.
During this timeframe, the fund started lagging both the benchmark and the S&P 500; nevertheless, it did not lose money, just lost money versus the passive investments.
In July 2013, the rest of the team was replaced by the new fund manager, Hugh Mullin, who was later joined by Russell Bloomfield in October 2013.
Since the fund management change, this fund started resembling a mini index fund. It has performed right in line with the benchmark, beating it by less than 1%, and both the fund and the Russell 1000 Value trailed the S&P 500 by a large margin.
While we don't yet have 3-year numbers for the newest managers, we can look at the numbers since the departure of the star manager who delivered the alpha.
As we can see, on both a 3 year and 5-year basis, this fund has looked like a poster child for.... "should of buy an index fund."
The fund has taken market betas and delivered a negative alpha, trailing the benchmark in returns over both time periods.
With an R-Squared of over 97, much of the performance can be attributed to the underlying move in the benchmark.
In full fairness to the fund managers, they did outperform in 2015, losing less than both the Russell 1000 and the majority of the peers in the category.
The other element of the fund that bothers me is the lack of delivering on the key stated purpose of "high current income."
The fund yields 1.35%, quite a bit less than the 2.68% for the iShares (NYSEARCA:IWD), and 2.8% for the S&P 500 SPDR ETF.
It has also had a fairly decent capital gains distribution in 2015 as the portfolio was being turned over, generating phantom income for investors. For anyone holding this fund, it may be best to hold it in a qualified account.
Our Take & Bottom Line
While in absolute terms, the fund is not bad, since the departure of Warren Spitz, the fund has failed being an alpha fund that delivers and has become "yet another fund." Obviously, existing investors in the fund have likely not received a notice advising them to look elsewhere. After all, Columbia Threadneedle does not want you to take money out and go elsewhere. Investors who chose this fund for the market, benchmark and category-beating performance under the leadership of the former manager have a lot to consider.
Bottom line, in its current form, it is not a fund I would invest in myself or recommend to our clients. While this is not to say I don't expect the current fund managers to deliver alpha in the future, this is not the same fund as it once was and it would be prudent to see tangible results from the current team.
For anyone on the sidelines reading this, the lesson here is that you should include research on the manager's tenure at the fund and their performance in other funds they manage concurrently or previously managed, as part of your due diligence process. A 5 star Morningstar rating is meaningless if the management team that earned that rating is no longer around.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Nothing in this article should be construed as investment advice. Please consult your financial professional to see how anything discussed here applies to you. This is not a solicitation to buy or sell any securities. This is not Tax Advice. Please consult your tax professional. The author previously worked for Ameriprise Financial, the parent company of Columbia Threadneedle Investments.