Outflows lead to shrinking investment teams among many active managers.
This article was originally published in the March 2017 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
When investment managers begin laying off employees, investors should beware. That's especially true when investment team members are let go. Layoffs have recently surged among active managers, as investors continue to shift assets to passive funds. In 2016, a record $340 billion poured out of active funds, while passive funds gained $505 billion.
We compiled a list of investment managers that downsized their staff in 2016. All of these firms had broad layoffs, typically ranging from 2% to 10% of firmwide employees, and most parted ways with investment professionals. In aggregate, these firms accounted for more than one third of active fund outflows in 2016.
Putnam's active equity business continues to struggle, which led to significant investment team layoffs in 2016. The firm parted ways with CIO Walter Donovan, four portfolio managers, and nine equity analysts. That represents a meaningful reduction in resources. The equity analyst staff stands at 33 members. We currently rate 10 Putnam funds, but we only recommend three with Morningstar Analyst Ratings of Bronze. Seven receive Neutral ratings.
Poor performance and team turnover at Waddell & Reed WDR have led to outflows. Michael Avery, former president and lead manager on the firm's largest strategy, retired in 2016. Meanwhile, three prominent portfolio managers departed between November 2013 and July 2014. The firm has experienced massive redemptions, which spurred the company to reduce its analyst staff by seven members in 2016. We assign the company a Negative Parent Pillar rating, in part because of the turnover.
Scout Investments' equity business has struggled since the lead manager on its once-flagship fund Scout International UMBWX departed in 2014. The firm downsized its equity research team by six people in 2016, and three others left. Reams Asset Management, an autonomous fixed-income team that Scout acquired in 2010, remains on solid footing. But concerns about the equity side led us to reduce the company's Parent rating to Negative in January 2017.
GMO's strict focus on valuations has led to defensive positioning and subpar performance over the last several years. Investors have withdrawn assets accordingly; the firm's assets under management fell to $77 billion as of December 2016 from $124 billion in June 2014. That prompted GMO to lay off 10% of its 650-person staff in 2016, including three portfolio managers and nine analysts.