Sometime back in the 1990s my financial adviser and I were discussing an investment in the Fidelity Contrafund, a high-performing mutual fund helmed then — and still — by the legendary Will Danoff.
I can’t recall exactly, but I expressed some misgivings about the fund’s fees.
“You’re buying Will Danoff,” my financial adviser said.
I didn’t know if that was a company or an individual. I do now. Danoff is still running the $100-billion-plus Contrafund, making him one of the few big names left from the 1960s through 1990s golden era, when investors were drawn to actively managed mutual funds based on a star money manager.
We are talking here about Peter Lynch and Jeffrey Vinik, respectively, of Fidelity’s Magellan Fund, John Neff of Vanguard’s Windsor Fund (which I owned for years) and, more recently, Pimco’s Bill Gross.
They are a vanishing species.
Danoff notwithstanding, the era of the mutual fund solo star has been greatly reduced as research teams — with sophisticated analytical tools — have taken their place. In most instances, those teams provide a deep bench that can take over without missing a step.
Morningstar investment research firm last week issued a report saying the same thing and adding that fund managers just don’t matter that much anymore.
Since the 1990s, “75 percent of actively managed U.S. equity and fixed-income funds are run by teams,” according to Morningstar. “The remaining 25 percent may have a single manager listed, but are assumed to be supported by a research staff with strict processes and restrictions for what stocks fit into their narrow mandate.”
“If your research team has a staff picking stocks based on x, y and z, you will find when there is turnover on the management team, the fund or the process comes to the same conclusions,” said Madison Sargis, one of the report’s authors. “These days, a fund at an asset management firm is not just a portfolio manager, it is a full team of people. On average, the team still functions even with the change of any one person, even if it is the named manager.”
The Morningstar report concluded the following:
● A fund manager’s experience has no effect on a fund’s returns.
● Management change in a fund has no bearing on future returns.
● Investors overreact to fund manager changes, often by withdrawing their money.
“Funds no longer live and die by their managers,” the report said. “The fund industry has matured. Funds are run by a team of people, down to the entry-level research analyst performing due diligence on a stock or bond.”
Michael Falk, of Focus Consulting Group in Chicago, agrees.
“It’s more teams versus individuals today,” Falk said of mutual funds “The complexity of the world is higher than it was 20 years ago, which means you need to be tapping more expert judgments to make better decisions.
“When you manage oodles of money like any successful fund manager, like Bill Gross did, the top of the food chain is the portfolio manager,” Falk said. “But so much of the information is coming from the people on the team or other analysts.”
Jay Weinstein, a managing director at Bronfman Rothschild Wealth Advisors in Rockville, Md., compared mutual fund managers to baseball managers.
“My son, the baseball sabermetrics genius, has taught me that managers have a shockingly small influence on the outcome of games,” he said. “ I suspect that with these very large funds, the same thing is true.”
Weinstein went one step further, suggesting that even wonky research teams have difficulty overcoming the randomness of capital markets.
“I don’t think the study’s findings have anything to do with the team approach or succession plan and everything to do with luck and random variation,” he said. “By the way, that’s the answer to about 90 percent of investing questions, it just doesn’t make good copy.
“The departing managers probably have less influence on the returns of the fund [vs. competitors or some benchmark] in the first place, and as such the lack of return changes after they leave makes perfect sense to me.”