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Is the Era of the Star Fund Manager Over?

We wouldn't call it history just yet.

Karen Dolan, 11/13/2007

In October, Janus announced that it was filling the void left on Janus Fund JANSX by one of its stars, David Corkins, with two managers instead of one. Days later, news surfaced that Fidelity plans to have a broad lineup of managers running some new funds rather than entrusting them to just one person. In a different twist on the same theme, Vanguard has gradually moved more to a system of multiple managers over the years. But, in this case, Vanguard has combined multiple outside subadvisors to manage several of its funds.

We've noticed a growing trend toward multiple managers at a number of fund companies. There are several reasons driving a shift. For one, institutions, consultants, and financial advisors may be reticent to entrust client assets with a fund run by a single manager who's not backed by a very deep team. Those constituencies drive a lion's share of flows, and fund shops are paying attention to what they favor. Fund companies are also painfully aware that investors who buy a fund because of the manager often run for the hills when that person leaves or retires. Thus, a move to multiple managers can help smooth over high-profile departures and reduce the rush of outflows that often come with it. Finally, there are more assets than ever in mutual funds, and the job has grown more complex.

Perhaps the most enticing reason for fund companies to consider a multiple-manager system is the success that American Funds, Dodge & Cox, and Primecap have had with it. Those firms' ability to deliver performance, gather assets, and handle growth has driven rivals to consider whether a group of managers is a better mousetrap. At the very same time, some legendary single-manager funds, such as Bill Miller's Legg Mason Value LMVTX and Bill Nygren's charges at Oakmark, have hit rough patches.

But will the multiple-manager or team-managed system work for firms that have previously used single-manager funds? We think that depends entirely on a firm's culture.

Teams Versus Sleeves
Before we go further, we should clarify that there are two ways to approach multiple-manager models. In one scenario, the managers work on a team and make decisions together. In the other case, each manager runs his or her own piece of the portfolio separately.

Although the risks to the star system are clear, we think there are also risks to each of these alternatives. When decisions are made at the team level, for instance, the members of the team should somehow complement one another or make each other better. If that's not the case, the structure can slow down decisions, extinguish conviction, lead to group think, and diminish accountability. Likewise, when multiple managers run separate sleeves independently of each other, the success is going to depend on the oversight and how the pieces work together as a whole. No one individual is going to share credit or take blame.

Capital Research (advisor to the American Funds) is a tried and true example of the "sleeve" system's success, leaving many rival asset managers drooling over its results. Capital has successfully applied the "multiple portfolio counselor" model for the past 50 years. Different managers independently run portions of each portfolio, and the research analysts usually run a portion as well. That model has helped Capital deal with departures (though, there haven't been many), retirements, and large and growing asset bases.PAGEBREAK

Culture Is Key
The most critical component of Capital's success with this system, however, is not its mere existence. The reason it works so well is that the firm's culture revolves around it. The portfolio counselor concept is not a makeshift, temporary fix to anything. Nor was it put in place as a marketing ploy. It is how money is managed at Capital, plain and simple, and it helps the company attract, develop, and retain investors who buy into its advantages. The same kind of cultural support for multiple managers exists at Dodge & Cox and Primecap, among others.

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