Mutual Funds: Star manager to retire

The market proves again and again that there aren't that many great fund managers, so when one of them calls it quits with his legend still intact, investors should take notice and shareholders should decide if they want to hang around once the bandleader has passed his baton to the next guy.

On March 1, Marty Whitman is leaving the Third Avenue Value fund and passing the stick to current co-manager Ian Lapey, in a move that probably has shareholders cringing.

Whitman started the fund late in 1990 and was the only named manager on it until July of 2009, when Lapey was officially put in the co-pilot's seat. Since Whitman opened the fund, Third Avenue Value's annualized return of nearly 12 percent is almost 2 percent better than the Standard & Poor's 500 Index, and roughly 5 percent ahead of the MSCI World Index.

That's not beating the indexes, it's murdering them, and it makes Whitman's record the envy of virtually any manager who has been running a fund for as long as he has. What's more, his style has tremendous appeal, as it can be boiled down into three words: Cheap and safe.

Whitman has never been afraid to be wrong, perhaps because he hasn't been wrong for long. Typically, when the fund has struggled it's because Whitman was "early," buying into something before the worst was over, convinced he could ride it out until the market recognized the values he saw. It didn't always make the fund easy to hang onto, but it worked.

He's one of the star rare managers who appears to be going out with the glow still intact. By comparison, Bill Miller of Legg Mason Value Trust is exiting his fund this spring, but his legend was destroyed by years of underperformance. Long before Miller said he was pulling the rip cord, his shareholders were ready to bail out on him; Whitman's fans, by comparison, want him to stick around.

But nothing lasts forever, and Whitman's age has been a concern for years now. When everyone else struggled in 2008, investors in Third Avenue Value wondered whether the fund's problems - it was well below-average in the world-stock category with a 44.5 percent loss - had something to do with Whitman being in his mid-80s at the time.

That's part of the reason why about $2 billion left the fund since the start of 2008, even after the fund bounced back from the financial crisis with above-average return in '09-10. That tide - and talk about Whitman's age - picked up again in 2011, when the fund lost more than 20 percent to rank in the bottom 10 percent of its peer group.

Thus far this year, few people are concerned about the 87-year-old Whitman's age; the fund is already up double-digits for the year, ranking near the top of the heap in that short-term time frame.

The real problem with Whitman's age has been that his investment strategy has always taken the long-term view, and when he has said long-term, he was always willing to look many years into the future to wait for his deep value bets to pay off. Crass as it sounds, there are fund analysts who have been worried that it will be someone else who is left trying to decide if they get to cash in Whitman's bets.

That someone is Lapey, and while he's been at Whitman's shoulder for awhile now, some observers are less willing to give him a pass for the last few years - most notably the lousy numbers from 2011 - than they might give Whitman. (Whitman is not leaving the company; he will remain as chairman of the Third Avenue fund firm and will undoubtedly be a dominant presence, but he won't be the triggerman for the fund.)

While Lapey is not going to change the safe-and-cheap, concentrated-portfolio philosophy, he has some tough sledding. Morningstar currently gives Third Avenue Value just two stars, though it also gives the fund it's silver analyst rating, meaning it expects good things going forward.

Investors won't be so patient. If Lapey can continue the hot short-term trend now that it's just his name on the door, he'll buy time to prove that he is a worthy successor to Whitman. Most industry watchers say that Whitman fans should give Lapey that time, if only because he is Whitman's hand-picked heir.

"When a manager leaves at the top of his game, I have more confidence in the succeeding manager because the prior one could usually take enough time and deeply consider their successor's merits before exiting," said Jeff Tjornehoj, head of Lipper Americas Research. "For many, this is their life's work and they don't want their fund's legacy sullied by incompetency."

For now, Lapey officially has the title of "the next Marty Whitman." Ultimately, shareholders should give him a chance to prove whether he really is, while being thankful for the years of superior results they got from Whitman himself.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.

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