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Fund Managers of the Year and the Cover Story Curse

By January 26, 2009

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A couple of weeks ago, Morningstar announced their “Fund Managers of the Year” for 2008. In addition, various media outlets are highlighting the funds that were able to, either by luck or by skill, minimize the downside last year (apparently, no pure U.S. stock fund was in the green in 2008).

Year after year, it’s hard to miss these rave reviews, as they are mentioned in nearly every major finance magazine and website. However, you should be thoughtful before selling your current funds in favor of what seems to be a surefire winner for 2009.

The thing that comes to mind when I consider these fund manager awards and accolades is the so-called “cover story curse” associated with companies that are highlighted on the cover of BusinessWeek. A host of analysts studied the curse at several business magazines -- BusinessWeek, Forbes and Fortune -- and they concluded, “a positive or negative cover story marks the end of a company’s extreme behavior, either good or bad. After the cover story, they tend to regress, in their corporate way, toward the mean.” Surprisingly, BusinessWeek sponsored the study. Is there a curse on fund managers who win awards and grace the covers of business and finance magazines?

While I haven’t yet seen a “cover story curse” study involving fund managers of the year, a review of past winners’ most recent performance might help. Every mutual fund that was on the list of the 2006 Morningstar Fund Managers of the Year -- five funds were mentioned -- underperformed their benchmark index in 2007; in fact, some missed the mark by double digits. From that same group, four out of five underperformed again in 2008.

This doesn’t mean that the funds managed by award-winning managers should be avoided; rather, it means simply not to buy funds based on the fund manager receiving an award or being touted as having a secret sauce and missing the 2008 market beat-down.

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