There are two very distinct schools of thought when it comes to deciding who should lead an actively managed mutual fund. Some funds opt for the team approach, touting the performance benefits of having a broad team of managers all working together. Other funds choose to market themselves around one or two "All-Stars," proven market performers who bring star power and name recognition to the fund, guiding the fund with their strong instincts and vision. In this article, we will examine both styles of management, exploring the pros and cons of each style to help you decide which one best fits your investing needs.
SEE: Active Vs. Passive ETF Investing
The mutual fund team concept is getting a great deal of attention as the SEC requires mutual fund companies to list more people involved with the investment decision-making process on advertising and regulatory filings. Team-managed funds are required to list each portfolio manager of a fund, as well as the team leader. This change gives shareholders and potential shareholders a greater opportunity to evaluate the backgrounds of more of the people that make a major contribution to a mutual fund.
Fund companies normally post biographies of their portfolio managers on the company website, and some of these companies even post biographies of their contributing analysts. Additionally, funds are now required to disclose a manager's personal stake in the funds that he or she manages, as well as whether he or she manages other portfolios. The new rules are consistent with the current investment climate of full disclosure and have positive implications for investors, since investors can never have enough information.
The most obvious advantage of the team concept is continuity. If one of the team members of a mutual fund leaves the company, the investment process should be able to continue without much of a disruption. Another advantage of the team concept is that people tend to work more closely together, creating a more collegial working environment. The hope is that there will be a diverse range of opinions, which allows managers to consider all options rather than having to rely on a narrower framework.
"Groupthink" is a big hazard for team-player mutual funds. Groupthink occurs when people begin to let the group shape their individual opinions. The group begins to reject concepts that come from outside, and members strive for unanimity above all else. Another disadvantage is that some mutual fund companies are less inclined to provide you with manager and analyst biographies if they market their fund as team-managed. This is especially true for load mutual fund companies. Load companies do not always post detailed information about their portfolio managers or analysts on their websites and their financial advisors may or may not provide similar information to their clients. A paying investor should have the right to access this type of information. However, many investors do not always act in their own best interests or seek the information necessary to make thoughtful investment decisions. Ultimately, the financial advisor serves as the gatekeeper of information.
Some mutual fund companies advertise that only one or two people are primarily responsible for making the investment decisions, especially if the key decision makers have produced excellent results or have very strong investment backgrounds. Years ago, it was common for a mutual fund company to list its chief executive officer as the sole portfolio manager for all of its funds. By any standard, that is quite a bit of work for one individual! To some extent, the "All-Star" concept is a misnomer and more accurately reflects how a fund is marketed, rather than how it is managed. Virtually every All-Star fund has a horde of research analysts who contribute, making the process more of a collaborative effort despite the advertising literature listing only one person as the portfolio manager.
The Mutual Series Funds of the 1980s and 1990s are a good example of the star manager misnomer. Michael Price, the former owner of the Mutual Series Funds, was sometimes listed as the sole portfolio manager of all of its funds. Price was certainly the most accountable among all of the investment professionals at the firm, but he did not do all of the work himself. The Mutual Series Funds had a very talented investment team that played a major role in the success of this company.
It is unlikely that the Mutual Series funds would have been as successful in the 1980s and 1990s without investment professionals such as Jeffrey Altman, Lawrence Sondike, David Winters and Robert Friedman, among others. Essentially, what these funds show is that there are advantages to gain by putting a face to a fund, even if in truth there are many people working behind the scenes.
Accountability and marketability are the primary advantages of the star mutual fund manager approach. Also, when one person is responsible for making nearly all of the tough investment decisions, there is little incentive for the analysts to engage in groupthink. The analysts who support the portfolio manager need only be concerned with selecting the best investments. The star manager system also allows mutual fund companies to market the portfolio manager as well as the mutual fund. Sometimes, it is easier for the average retail investor to relate to a real person rather than an anonymous management team. Also, it is in the manager's best interest to make the fund profitable - after all, his or her reputation is at stake.
If the portfolio manager leaves, there is often a loss of continuity and the potential for shareholder exodus. If the departing all-star was seen as the primary driver behind the fund's success, the future performance of the portfolio could suffer. In addition, if the portfolio manager has attracted a strong investor following, some of the fund's shareholders may decide to sell their shares after learning that their manager has left.
The Bottom Line
Mutual funds vary in terms of their management structures and one size generally does not fit all investors. Some people feel more comfortable with the all-star system because it can be easier to relate to one or two prominent people instead of a mysterious group of managers and analysts. In contrast, the team structure may be a better fit for people who appreciate the continuity that this approach provides when a manager leaves.
Regardless of the approach you take, be it "team" or "all-star," it is important to keep in mind that a managed-fund structure is only as good as the people who support the investment process.