Mutual Fund Managers' Multiplication Mess

Traditionally, mutual funds are run by just one person, or at most a handful, backed up by a research team. They work together using one common approach to deliver returns for fundholders. But now, more funds are increasing the number of managers running the show -- a move that could increase funds' expenses while diluting their returns.

Increasing the number of folks at a fund's helm isn't entirely a bad decision. It helps reduce the risk that one manager's bad picks will torpedo a fund's entire annual performance. But on the flipside, a manager who turns in an amazing performance will likely find his or her results watered down by the more middling returns of the other people in charge.

Since the majority of actively managed mutual funds underperform the market average, I'm not surprised that fund companies might lack confidence in any single manager. But it'd be a shame if the funds that do turn in consistently strong performance got weakened by a sudden influx of also-rans.

Calvert hedges its bets
The Calvert World Values International Equity (CWVGX) fund recently announced that it was dropping its subadvisor Acadian Asset Management. Instead, it will pursue a multiple-manager approach, combining its in-house team with managers from the Martin Currie and Thornburg Investment Management companies. Fund assets will be roughly equally divided among the three, with some flexibility permitted. Since the fund has failed to outperform its benchmark for many years running, I suppose it had to make some changes.

As the fund company explained the change:

Calvert believes that the multi-manager, investment style-balanced approach offers more upside opportunity in different market environments, as well as enhanced opportunity for risk control and diversification. The three managers have complementary investment styles that will help maximize alpha, while enabling Calvert's equity team to better control risk in the Fund, as well as to maintain expenses at the Fund level.

Wait, wait -- increasing the fund's management teams from one to three will somehow keep expenses low? That doesn't sound right to me. If the three teams are willing to take no more in total for fees than the single manager used to, I suppose it works out -- but I'm decidedly skeptical.

Do it yourself
When funds institute multiple-manager systems, they're doing something for you that you might want to do on your own. Ideally, you'd want to divide your mutual fund money between managers you admire. That gets tricky when a single fund starts packing on multiple management teams. More concentrated leadership makes it easier for investors to determine which fund managers are more talented, and thus more worthy of an investment.

Still, there are plenty of funds that don't seem to have subcontracted out their assets yet. I've rounded up some intriguing no-load funds without subadvisors, and thrown in an index fund for comparison's sake.

Data: Morningstar.com.

If you're confident in their managers, go ahead and choose managed funds for your portfolio. But if you're wary of a many-headed hydra controlling your money, or just want to pursue the best odds of good performance, stick with low-cost index funds instead.