When a Fund Loses Its Star

With so many fund managers nearing retirement age, investors will need to decide whether to stick with the new guy or move on

By Aaron Pressman

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Poineer's Feltus and Wright: Former manager Patel is a tough act to follow Jason Grow

Tracy Wright was sitting in shock in her Boston office. It was April 2007, and the junk bond analyst for Pioneer Investment Management had just learned that the firm's star fund manager, Margie Patel, had abruptly resigned to join a rival. Wright and colleague Andrew Feltus would take Patel's place at the $6 billion Pioneer High Yield fund. "There were a number of holy this's and holy that's," she says.

Wright, 39, and Feltus, 40, had fewer years of investing experience combined than the 58-year-old Patel, who left to join Boston-based Evergreen Investments. And they had to get up to speed fast: Within weeks of the two being named co-managers, the junk bond market peaked and began a nasty downturn that hasn't ended.

Fund manager transitions can often be rocky, all the more so when the departing talent racked up top-notch results like Patel's. Investors will have to brace themselves for similar turbulence ahead as a wave of Baby Boom-era stars heads for retirement. The proportion of workers in the finance industry over 50 and nearing retirement will double in the next 10 years, according to a Boston Consulting Group study.

Regardless of the skill of incoming managers, funds in transition suffer from common problems. Hedge funds and other traders try to guess what positions might be sold and design strategies to squeeze profit from a fund's shifts. Sometimes investors in a fund jump ship en masse, forcing ill-timed asset sales. In many cases there is a change in investing styles. The lesson for investors isn't necessarily to flee when a star manager moves on but to make a more informed decision by being aware of challenges new managers face.

Feltus and Wright were not high-yield neophytes. Feltus had racked up a better record than Patel while running the firm's smaller but similar global high-yield fund over the previous five years. After taking over the junk bond fund, Feltus and Wright finished 2007 with a 7% gain, ranking in the top 2% of all high-yield funds, according to Morningstar (MORN). But 2008 has been a tough year for junk bonds, with the average fund down 3.3%. Pioneer has lost 3.6% and ranks below 7 out of 10 similar funds.

That's quite a drop from the fund's 10-year track record, which bests 99% of the industry. Says Feltus, "I expected to see a correction in the market. I did not expect to see the financial system of the United States melt down." Whether because of a bad market for junk or nerves about the new managers, investors pulled over $2 billion from the fund in 2007. Financial adviser David Nielsen at cfd Investments in Indiana wasn't one of them. "Most high-yield funds have had a bad year," he says. "The managers have been following in Margie's footsteps very well."

That doesn't mean they are copying Patel's style. When they evaluated the portfolio, they immediately wanted to make some big changes. And repositioning a portfolio without tipping off the markets is one of the biggest challenges for managers taking over a fund. For Wright, who had a less traditional career path than Feltus—she was a professional-level snowboarder for four years, while he went straight into the financial world—that meant trying to keep the markets guessing about whether they were going to get rid of Patel's biggest position: a holding of over 10% in debt issued by paper giant AbitibiBowater (ABH). Wright saw paper as an industry in decline. Feltus objected to the size of the position: "I don't want to have one [position] that's going to make or break my year."

Dumping Abitibi was the exact move many Wall Street junk bond trading desks expected, however. Traders sold AbitibiBowater bonds short, pushing down prices. Feltus and Wright didn't want to sell at depressed values so they zig-zagged, sticking with Abitibi some days and selling heavily other days. After six weeks they had flummoxed the shorts, who moved on to other trades.