Funds move away from star managers | Long Island Investment Managers

Funds move away from star managers

Mutual fund star managers have gone the way of the vinyl record: They’re cool to have, expensive to get, and sometimes, not the best quality.

In their place, fund companies like Federated Investors, Eaton Vance and Invesco are moving in favor of a team-oriented approach. Even Fidelity Investments, home of one of the first star managers, Peter Lynch, has switched some funds to a team-managed approach.

The move helps fund companies defend against poaching, protect their funds’ returns, and shield themselves from the level of outflows seen at competing firms after their high-profile stars have flamed out.

“You have eliminated the proverbial risk of being hit by a bus,” said Duncan Richardson, chief equity investment officer at Eaton Vance.

What’s more, Richardson says it is difficult for star managers to adapt during volatile cycles, and companies now realize “that they are better off going for a systemic process than an all-knowing manager.”

On the other hand, fund companies taking on the team-managed approach may have a tougher time getting in front of investors and advisers, which could make the change more cyclical than permanent, said Russ Kinnel, director of equity research at Morningstar Inc.

“It’s much harder to get noticed with a team-managed fund,” he said. “It’s a harder story to tell.”

That could mean that the push to team management is temporary. “This is just cyclical,” Kinnel says.

But companies that have embraced the idea are putting marketing dollars and know-how behind team-managed funds in an effort to stand out.

Five years ago, fund companies spent million of dollars touting their star managers and sending them on the road to meet with investors. But the financial crisis and recent market volatility have made it clear that even the brightest stars can quickly lose their luster.

Big names like Bruce Berkowitz, Bill Gross and Bill Miller have stumbled in the last several months, losing millions of dollars for investors.

Many “star managers” made their name by focusing on the fundamentals of the companies in their portfolios. But in today’s environment, where macroeconomic factors play such a significant role in stock performance, that strategy has not worked as well, said Don Phillips, president of fund research at Morningstar Inc.

Stars might shine for periods of time, but they are more susceptible to dips than their team-managed counterparts.

A 2008 University of Colorado at Denver Business School study found that while single managers outperform team-managed funds when taking into account fund returns alone, the difference in performance was small. The study also found that the team management structure brought more consistent returns.

“The team structure is more conservative so they do better in a volatile environment,” said Yufeng Han, one of the authors of the study.
And these days, many advisers prefer consistency.

Steven Roge, an adviser with R.W. Roge & Co, a Beverly, Massachusetts advisory, said his firm often sees a red flag when a fund company touts a star manager. That wariness at the firm, which manages $225 billion in assets, has been heightened by the volatile markets, he said.

“You have to be leery of star managers because active investing overall has lost some luster,” he said.

Still, a team-managed structure does not always mean better results, especially if the managers are like minded, Kinnel said.

“Investors need to make sure that the approach brings multiple independent managers’ points of view to the funds rather than having them make collective decisions,” he said.

Kinnel said American Funds, among the largest providers of team-managed funds, has a good process in place for management. But American has stumbled. Its flagship $132.5 billion Growth Fund of America has 12 managers and has lagged its peers for the past one, three and five years, according to Morningstar.

Since Dec. 31, 2007, Federated has made 12 of its single-manager funds team managed, according to data collected for Reuters by Morningstar Inc. Now, only 29 of the firm’s 87 equity and fixed income funds are managed by one person and the firm will continue to add managers to its single-manager funds where appropriate, a spokeswoman said.

Federated made the shift in response to clients’ increased interest in how a fund manages investments, said John Fisher, president and chief executive of Federated Advisor Companies, the investment management division of Federated Investors. If a manager leaves, the process is still in place with a team-managed fund, Fisher said.

The team approach is also self serving for fund companies. It gives them a stronger line of defense from losing managers to competitors, Richardson said.

“It’s a lot harder to lift out a team than it is to lift out a single manager,” he said.

Eaton Vance has added managers to 11 of its single-managed funds since the end of 2007, according to Morningstar. Today 61 of its the firm’s 117 fixed income and equity funds are team managed. The majority of its individual-managed funds are municipal bond funds.

Ron Sloan, chief investment officer of Invesco, said the firm has transitioned 20 funds to be team managed since the end of 2007, excluding target-date funds. Sloan said the move brought multiple points of view to a fund’s management.

Even Fidelity began moving more of its funds to a team-managed approach in 2007. The firm now has 22 funds that are team managed, not including its target-date fund series. Among them are 17 Stock Selector Funds with multiple managers who oversee different sleeves of the funds.

Brian Hogan, president of Fidelity’s equity group, said the move takes advantage of talents within the firm, including a number of managers who are strong in sector investing.

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