Friday, November 23, 2007

Fund Management - Grooming & Managing Managers


IT'S gloomy but strategic, morbid but necessary. As the managing director in charge of fund managers at T. Rowe Price in Baltimore, Jim Kennedy, says: "I have a plan ready in case any one of these people gets hit by a truck one day."

Luckily, Mr. Kennedy has seldom had to put his plan into action. Though he estimates that at least 90 percent of the equity analysts and managers he supervises have received outside offers in the last 18 months, only two of the people he has hired in the past decade have left the company.

In that sense, T. Rowe Price, with 60 funds under management, has beaten the industry average. The typical stay of a U.S. fund manager is about 3.4 years, according to Don Phillips, publisher of the fund rating service Morningstar in Chicago.

A company's style of hiring, training and assigning portfolio managers can be important for investors to choose funds.

These styles can vary greatly. At T. Rowe Price, Mr. Kennedy said he preferred to hire two to three business school graduates each year and groom them for eventual fund management. Early in their careers as analysts, these hirees are assigned to particular funds in order to give them a sense of ownership and responsibility.

At HSBC Asset Management in London, Paul Guidone, chief investment officer, said he preferred to hire experienced managers who have already proven their abilities as professional investors.

It was only in 1993 that the U.S. Securities and Exchange Commission began requiring fund families to name portfolio managers in a prospectus. Before that, according to Mr. Phillips, fund families used a variety of tricks to disguise who was actually making investment decisions for a fund.

One such technique involved "backdating" a new manager's involvement with a fund in order to prevent shareholders from panicking and cashing in their shares if a more famous manager departed.

"For years, the industry stonewalled investors on this and said it was for investors' own good," said Mr. Phillips. "But I doubt many fund managers would buy a stock if the company said to them, 'We're not going to tell you who runs our company."

Even with increased disclosure requirements, "there are still a number of figurehead managers out there," said Mr. Phillips. Though a fund company may list four or five names in a prospectus, the first three or four may be company executives who are not actively involved in selecting investments for a fund.

In other cases, a manager's involvement may be oriented toward "top-down" decision-making. Christian Wignall, chief investment officer at GT Global Financial Services in San Francisco, is in charge of setting the overall strategy for 17 different equity funds.But Mr. Wignall leaves individual stock picks to regional specialists. As a result, most GT funds name at least two managers.

Even when only one portfolio manager is named, the degree of back-up support he or she uses can vary widely. William Sams, a manager for First Pacific Advisors and one of the stars in the U.S. mutual fund arena, works out of an office in Dallas and evaluates outside research recommendations on his own. Tom Sweeney, manager of Fidelity's Capital Appreciation Fund, also has a reputation for sticking to his own research, though Fidelity employs more than 170 analysts.

"Fidelity is the epitome of what is called the star system," said Mr. Phillips. "They have research analysts available for all their managers but they don't force them to take any of their recommendations."

AT Kemper Financial Services in Chicago (soon to be wholly owned by the Zurich Insurance Group), individual fund managers are required to stick to stocks screened by Kemper's 38 research analysts. At least 80 percent of the Kemper Growth Fund, Blue Chip Fund and the equity portion of the Total Return Fund must come from 150 approved stocks on the company's Focus List. Managers must form the remaining 20 percent of those portfolios from a Qualified List of 350 companies.

"The screening process helps us identify which companies are attractively priced long-term growth stocks," said Tom Regner, chief equity strategist at Kemper. "But it's up to the individual managers to achieve a high, risk-adjusted return and to maintain proper diversification."

For investors, the advantage of investing in a fund with only one listed manager is increased accountability. Individual managers bear sole responsibility for fund performance, and they like to see outstanding return figures next to their names.

In the United States, this has led to the increased attention given to two dozen or so "star" managers, among them Mr. Sams, Jean-Marie Eveillard at SoGen International, and Martin Whitman, manager of the Third Avenue Value Fund.

Two other well-known investors, Caroline Murphy Ziegler and Elizabeth Bramwell, have recently set up their own fund management companies.

Ms. Ziegler and Ms. Bramwell point to the disadvantage of solo-managed funds: the risk of fund managers being hired away increases as they become well-known public figures. The growth of hedge funds has contributed to this trend, since they offer professional investors more money than the average retail firm can offer.

Just last month, for instance, Fidelity Investments lost Jeffrey Ubben, manager of the Value Fund since December 1992. Mr. Ubben's fund returned 7.63 percent last year, compared to a 1.3 percent rise in the Standard & Poor's 500 Index.

On average, however, Morningstar statistics show little difference between solo-managed or team-managed funds. Though one-manager funds make up about 70 percent of the 6,200 fund universe tracked by Morningstar, the average five-year total return on these funds hardly differs from team-managed funds.

In some cases, experts say team management simply makes sense. At Fleming Investment Management in London, Max Hopfl, the director responsible for international fund management, says a team of people is necessary on funds that cover large regions.

"You're going to have to cover 12 or 14 countries if you've got a Pacific Basin, European or emerging markets fund," said Max Hopfl, a director at Fleming Investment Management in London.responsible for international fund management at Flemin. "It just makes sense in those situations to use a number of specialists."

The superior, long-term performance of the American Funds Group also argues for team management, according to Mr. Phillips.At the top-performing American Funds Group, portfolios are divided up among six to eight managers with each manager selecting investments independently. A portion of each fund also goes to research analysts and is used to prepare them to take over fund management in the future.

Since a prospectus may not shed much light on a fund company's management style, Mr. Phillips recommends that individuals ask a number of questions before deciding to invest:. Though a fund company is not required to answer all of these questions, a company truly interested in winning investors' funds will try to provide as much information as possible.

Among the questions recommended:

• How old is the fund manager?

"Clearly you want to know if your manager is 80," said Mr. Phillips. "In general, you want to try to coordinate a manager's tenure with your investment time horizon."

• Does the manager have an equity stake in the fund management company?

• How much does a manager have invested in his or her own fund?

This can help indicate how committed a manager is to a fund. At T. Rowe Price, for instance, Mr. Kennedy says all of his managers invest a portion of their own money in their funds. "They're not required to," says Mr. Kennedy. "But if they didn't, I'd be worried."

• How many other funds is the manager in charge of?

A fund company attempting to capitalize on a star manager's name may be overloading that individual with responsibility. "If your fund is $20 million and your manager is running $1 billion in assets, then your fund may not be getting lots of attention," Mr. Phillips warns.

At HSBC Asset Management, Mr. Guidone says he measures his new managers against benchmark indices and average fund returns over one to three years."Investments don't necessarily turn out for you the minute you decide to take a position," he said.

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