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It used to be that all it took to build a successful mutual fund was to install a star manager at the helm, crank out a market-beating track record, and tout the fund's five-star Morningstar rating. Sure enough, assets flowed in as investors were wowed by the apparent investing prowess of the manager in question. However, in today's brave new investing world, relying heavily on star managers may be a thing of the past.
Change of fortune
Mutual fund columnist Chuck Jaffe recently penned an article stating that the era of the superstar mutual fund manager is over. He points out the recent manager change at legendary Fidelity Magellan (FMAGX), which was greeted with a fair amount of indifference by the investing community. Magellan, which grew to become the largest mutual fund in existence thanks in large part to the stellar track record garnered under investing guru Peter Lynch decades ago, has since fallen on hard times. Fund assets have fallen from a peak of nearly $110 billion to just $17 billion today, and the fund ranks in the bottom 6% of its peer group over the past decade. Jaffe concludes that star power just isn't what it used to be when it comes to fund managers.
And while many in the business might bemoan such developments, I think this is a positive development for the fund business. I've long held that, all else being equal, investors should invest in a fund run by a team of portfolio managers rather than by one superstar. Of course, everything else never is equal when it comes to funds, and there are a number of truly first-rate star managers and investors whose funds or investments anyone should be glad to own. Investors will always be drawn in by what the big guns like Warren Buffett or Bruce Berkowitz are doing. But my hope is that investors are finally getting the idea that what is important is the process, and not necessarily the manager.
There's no "I" in teamwork
As Magellan's recent struggles highlight, a mutual fund is only as good as its manager. Once Lynch left the helm in 1990, investors could no longer rely on the fund's prior track record to be a good indicator of how it would perform in the future. A new manager means new talents, a new way of doing things, frequently a new process. And although the most frequent reason investors dump funds is because of short-term underperformance, the primary reason you should be selling your fund is because of a manager change. Superstar investors are nice, but investors should realize that the fund's future prospects rest entirely on that person's back.
That's why I'm partial to mutual funds that utilize a cohesive, time-tested team approach. Under such an arrangement, investors don't have to worry about their star managers leaving or retiring. If the team approach is solid and the process is consistent across all the firm's products, there really shouldn't be a concern if any one person leaves the team. Things can pretty much carry on as usual, whereas if a star manager leaves, you're likely going to be left having to decide where else to take your money. There's a lot to be said for the consistency and reliability of a proven team approach to managing money.
One good example of a team approach done right can be found over at Dodge & Cox. Here, there's no reliance on superstar managers; rather, all investment decisions are made within a team construct, and within a consistent investment framework. For example, at Dodge & Cox Stock (DODGX), a nine-person team is responsible for selecting stocks that are temporarily undervalued but that have a good long-term growth outlook. Tech names play a big part in the portfolio, and include low-P/E stocks like Hewlett-Packard (NYSE: HPQ ) and Microsoft (Nasdaq: MSFT ) , as well as former highfliers like AOL (NYSE: AOL ) and Nokia (NYSE: NOK ) . Management sees the latter two stocks as being cheap and are counting on AOL's new leadership and Nokia's ability to snag significant market share in emerging markets to lift the stocks to new highs.
Over the years, the fund's team approach to making decisions has worked out extraordinarily well for shareholders. Over the most recent 15-year trailing period, the fund ranks ahead of 96% of all large-value funds, with an annualized 8% return versus the S&P 500's 5.7%. And since, like the shop's other funds, Dodge & Cox Stock is not overly reliant on any one star manager, investors should be able to own a fund like this for years or even decades and be assured that they are getting the same approach and the same process that brought the fund so much success in the past.
Ultimately, investors need to be careful about putting too much stock in superstar fund managers. While certain managers truly are talented enough to carry the show on their own, investors should look beyond the name and into the process itself. And don't discount a fund just because it doesn't have any big stars behind the helm. Investing is one case where two (or more!) heads can frequently be better than one.