Manager of the Year
In 1999, Garrett R. Van Wagoner, CFA, was named Value Line’s “Manager of the Year.” The Website for the Van Wagoner family of funds proudly boasts, “Prior to founding Van Wagoner Capital
Management, Inc. in 1995, Van Wagoner managed the Govett Smaller Companies Fund for three
years. This fund earned a 5-Star Morningstar, Inc. ranking as a result of its performance while Mr.
Van Wagoner was the portfolio manager.” As the table below indicates, the performance of the
fund, relative to appropriate benchmarks (the passive asset class funds of Dimensional Fund Advisors or DFA) was certainly spectacular:
Govett Smaller Companies Fund
DFA US Small Cap Portfolio
DFA US Micro Cap Portfolio
1993
58.5%
17.0%
21.0%
1994
28.8%
–0.1%
3.1%
1995
69.0%
30.9%
34.5%
Given the combined great performance along with the “Manager of the Year” award, investors
flocked to the Van Wagoner family of funds. The question is, were investors rewarded for their belief that past performance of an active manager is a reliable predictor of future performance? Once
again, the data indicates otherwise. On March 3, 2003, Van Wagoner liquidated three of its five
funds. And, as Beverly Goodman pointed out in her TheStreet.com column, there was not much left
to liquidate. Goodman observed that the combined asset base for these three funds had fallen from
$1.6 billion in the spring of 2000 to just $115 million, according to Morningstar.1
The three disappearing funds were the Van Wagoner Post-Venture Fund, Mid-Cap Growth Fund,
and Technology Fund. Let’s look at why Van Wagoner wanted to bury their results:


The Post-Venture Fund opened on December 31, 1996. From January 1997–December 2002,
the fund provided an annualized return of –16.0 percent, producing a cumulative return of –64.9
percent. For the same period, the S&P 500 Index returned 4.4 percent per annum and a cumulative return of 29.5 percent.
The Mid-Cap Growth Fund opened on December 31, 1995. From January 1996–December
2002, the fund provided an annualized return of –13.4 percent, producing a cumulative return of
533577023

–63.5 percent. For the same period, the S&P 500 returned 6.9 percent per annum and a cumulative return of 59.4 percent.
The Technology Fund opened on December 31, 1997. From January 1998–December 2002,
the fund provided an annualized return of –10.9 percent, producing a cumulative return of –43.9
percent. For the same period, the S&P returned –0.6 percent per annum and a cumulative return
of –2.9 percent.
Unfortunately, the SEC allows fund families such as Van Wagoner to discontinue publishing the
returns data of funds that have been either liquidated or merged out of existence. This enables fund
managers to present unrealistic pictures of the returns that investors in their family of funds actually
earned. In our opinion, the SEC would better serve investors if they required mutual funds to report
historical fund returns for both living and dead funds. If such reporting were required, it would become even clearer that the past performance of an active manager (or an actively managed fund) has
been an unreliable guide to future performance.
After liquidating the three aforementioned funds, there are two funds remaining in the Van Wagoner family — the Small-Cap Growth Fund and Emerging Growth Fund (which was designed to invest in US small-cap and mid-cap growth companies, not emerging markets as its name might suggest). For the seven-year period since inception, 1996-2002, the Small-Cap Growth Fund returned
0.2 percent per annum and produced a total return of just 1.7 percent. The Emerging Growth Fund
returned a –9.8 percent per annum and produced a total return of –51.6 percent. By comparison, the
passively managed DFA US Micro Cap fund returned 8.6 percent per annum, providing a cumulative return of 78.3 percent, and the DFA US Small Cap Fund returned 7.1 percent per annum,
providing a cumulative return of 61.7 percent.
We advise investors to reconsider placing their faith in the past performance of an active manager as
a guide to his or her future performance. The illustration offered to us by the Van Wagoner funds
provides us with additional data indicating our advice remains justified. The prudent strategy is to
simply accept market returns by investing in passive asset class funds, index funds or ExchangeTraded Funds (ETFs).
1
Beverly Goodman, More Funds Merge, Others Bite the Dust. TheStreet.com, March 6, 2003.
This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication
is for general information only and are not intended to serve as specific financial, accounting or tax advice. To be distributed only by a registered investment
advisor. Copyright © BAM Advisor Services, 2003.
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