How do the largest fund companies stack up?
This article originally appeared in the September issue of Morningstar FundInvestor.
Investing wisely in mutual funds requires you to know the fund company as well as the fund you own. Over the long haul the fund company behind the fund will be providing analyst support, setting fees, adjusting your manager's incentives, and likely hiring his or her replacement. How well the firm supports your fund will have a lot to do with how well the fund fares in the long haul. There will be quite a few points at which the fund company will decide between its near-term profits and the long-term benefit of fundholders.
With that in mind, I'm taking a quantitative look at how fund companies rate on a number of key metrics. We take data on all their individual funds and roll them up into percentile rankings to see the big picture. All share classes are included, but we exclude funds of funds to avoid double counting. You may recall that I last ran the data in the March 2010 issue using figures through December 2009. I looked at five-year relative performance, average Stewardship Grade, average manager investment, average manager tenure, and five-year manager retention. Average manager investment is calculated by assuming the midpoint of the reported ranges and then converted to a percentile ranking.
The five-year manager retention is calculated by looking to see what percentage of managers remain at the firm over the course of a year and then averaging that for five years. Hiring more managers won't hurt the fund company's manager-retention score, but losing managers will. Manager retention tells you a lot about a firm's culture and its ability to attract and retain top talent. If those who know the company best are fleeing, you probably should not be buying. I have also averaged those rankings for an overall score.
T. Rowe, Dodge & Cox, Harbor Lead on Returns
At the end of 2009, Janus and MFS were on top of the performance ranks. A couple of funds' aggressive bets on India helped Janus to the top before, and now they've brought them down to below average. MFS dipped a bit from averaging top 28% to top 45%.
Impressively, though, T. Rowe Price continues to have strong five-year performance. T. Rowe Price edged higher with top 24% performance. I like the fact that it was near the top both at the end of the bear market and now that there's been a strong rally. Dodge & Cox has rebounded from a hard 2008 to produce top 27% on average, and that makes it second-best in the return rankings. Harbor, which has a number of funds managed by PIMCO as well as some strong stock-pickers, comes in at an average of top 28%.
Federated, Janus, and BlackRock clocked in with the worst returns.
Our Stewardship Grades rate fund companies on their culture, their ethics, their fees, and their board. Although there are quantitative elements to the grades, it's also qualitative, the only element in these fund company rankings that isn't purely quantitative. We averaged the grades across all of the rated funds at each fund company. T. Rowe Price, American, Dodge & Cox, and Vanguard are among the best. They have low fees and strong investment cultures, and they consistently look out for investors' interests. Wells Fargo, John Hancock, and AllianceBernstein are near the bottom.
Our manager-tenure figures tell you how long a manager has been on his or her current fund. It's a smaller figure than experience in the industry is because it is specific to their current funds. You can really see a wide gulf separating fund companies here, so take a close look.
You'll see the figure spans from 21 years at Dodge & Cox to four years at Fidelity. Among the 10 largest fund companies, American Funds leads with an impressive 16 years. Franklin Templeton's 13-year average really overstates the experience there because there are a couple of managers with tenures above 30 years.
Fidelity is at the bottom, though that figure belies the manager's experience. For example, Larry Rakers ran a number of funds at Fidelity before taking the helm of Fidelity Dividend Growth
PIMCO also has a low five-year average tenure. PIMCO has seen a fair amount of manager tenure as it is an extremely demanding place to work. Some managers decide it's not for them, and other times PIMCO decides some managers are not for it. PIMCO has also launched a slew of funds in recent years, and you can't have tenure that's longer than the fund's existence.
Dodge & Cox has taken manager ownership up to $1 million across the board from an average of $860,000. Also worth noting is how tightly bunched the fund ownership figures are after the top few. American is second-best at $555,000, but the level dips below $200,000 beyond the top quintile.
On the negative side, AllianceBernstein averages just $46,000.
The leaders from the end of 2009 have mostly stayed in place. American Funds and Dodge & Cox have outstanding retention rates above 98% and 96%, respectively. T. Rowe Price was 93%, followed by Vanguard at 92%.
Invesco is dead last, as its retention rate declined significantly to 81% from 90%. The firm has seen quite a few departures from equity managers in the past 12 months. That's a red flag, and investors in Invesco funds should watch closely to see if things stabilize. Oppenheimer also dipped to 85% from 89% because it cleaned house in the wake of its 2008 bond-fund debacles (both taxable and munis were hit), and it also suffered a couple of departures from its foreign-stocks team to TCW.
The Overall Score: Dodge & Cox on Top
Dodge & Cox takes the prize thanks to its strong performance on all measures. Very few firms did well on every count. With its improved five-year performance, Dodge was able to move to first from third. T. Rowe Price slipped to second from first, but on most measures it scored as high or higher than it did in our last study. It offers stability in many different forms. Management rarely changes, and, even when it does, you can be sure that the strategy won't. The firm also prizes stability of returns above all else, as exemplified by the firm's ability to outperform in bear and bull markets.
American Funds moved to third, and it continues to have experienced managers and lose very few of them. This might seem a little off base if you think of recent performance first, but that's the beauty of this exercise--crunching a lot of numbers and getting an objective view of how these firms look. I am not a big fan of its bond funds, but its stock funds are outstanding, if unexciting.
Vanguard slipped a couple of notches. While it has had great Stewardship Grades and performance, tenure and manager investment have not been as strong. I'm a little forgiving, though, because it rotates index-fund managers, and those managers tend to run a number of funds, thus making it tough to have high investment levels. In addition, they aren't likely paid as much as the active managers from the big firms.
At the bottom are ING, Principal, and BlackRock. BlackRock's reputation as an institutional manager hasn't translated into its mutual funds, which were subpar on most of our metrics.