These four fund manager mistakes caught our attention

Bank shares Bite

Silver-rated Parnassus Mid-Cap (PARMX) has recently suffered from stock-picking errors, with huge losses leading to a Process downgrade in January 2024. The fund typically invests a large portion of its assets in companies with a Morningstar Economic Moat Wide or Narrow rating. compared to its benchmark (in this case, the Russell Midcap Index).

However, it had an unusually high allocation (more than 10%) to non-Moat firms from mid-2016 to the end of 2022. Some of these holdings included SelectQuote (SLQT), First Republic Bank (FRCB) and the now defunct Signature. Bank, which suffered substantial losses for the strategy. The firm brought in an experienced manager in 2024 to help identify unintended risks, but its focus on higher-growth stocks could hurt the fund’s protection in decline.

Strengths become weaknesses

Managers at Hartford MidCap (HFMCX) have made some missteps of late. Commander Phil Ruedi’s historical areas of strength, such as healthcare and technology, were the weakest areas over the past three calendar years. The team sold out of smaller stocks that relied on single-drug approvals after weak results in 2021 and 2022, but stock picks from these sectors in 2023 continued to underperform. Co-manager Mark Whitaker was not without blame for the mishandling of First Republic Bank, which was seized by the Federal Deposit Insurance Corporation in April 2023. The team replaced an analyst and reexamined all positions in the portfolio, though the results remain to be seen. The investment team’s lower conviction led to a drop in the People Pillar Rating to average from above average in January 2024, and a late June addition to the list does not change the fund’s outlook.

“Badly programmed” power outputs.

Some funds take a bold approach that requires particularly consistent execution. Neutral-rated Davis NY Venture (NYVTX) is one such fund, and it has struggled to deliver. Mistakes in stock selection and sector timing have accumulated in multiple market environments, such as its ill-timed exit from energy stocks in mid-2020. As another example, its sizeable stake in New Oriental Education & Technology Group ( EDU) peaked at about 6% of assets in 2021, before the share price fell more than 90%. While bold sectoral and regional bets are expected from this strategy, a prolonged period of ill-placed bets has dampened its long-term prospects. This resulted in a drop in people’s Pillar Rating to average from above average in October 2023.

Uncharacteristic short-term transactions

Finally, Bronze-rated Alger Small Cap Focus (AOFAX) watches as manager Amy Zhang tried some unusual short-term trades. The fund’s performance declined from late 2021 to early 2022, when some of its trades went south. While the portfolio moved back into healthcare and technology (the lead manager’s areas of strength) in 2023, it also built positions in speculative non-income biotech stocks, including Cabaletta Bio (CABA), one of the top 10 portfolio holdings as of January 2024. While investing in early-stage companies is not unusual for small growth strategies, it is unusual for this fund, which has historically preferred firms with more proven lines of business.

This article first appeared in the July 2024 issue of Morningstar FundInvestor magazine. Download a free copy of FundInvestor by visiting this website