Dodge & Cox and T. Rowe Price lead the way.
This is an update of a study that originally ran in Morningstar FundInvestor. We updated the data through the third quarter, resulting in some changes in the rankings.
It's time for my annual look at fund companies. I gather data on a number of key measures, then roll them all up into one big ranking to see how fund companies are doing overall.
Seeing the big picture helps to assess how strong a fund company is across the board. Choosing the right fund company is as important as choosing the right fund. After all, a fund doesn't operate in a vacuum. Managers generally draw on a common pool of analysts and traders. When a manager leaves or retires, his replacement often comes from that pool. Moreover, the fund company's values, investment abilities, and time horizon all come into play over the life a mutual fund.
I have summed up fund-company results based on a few key metrics: five-year relative performance ranking, Morningstar Analyst Rating, average manager tenure, average manager investment, and five-year retention rate. Then in each case we took that data set and turned it into a percentile rank among the 30 largest fund companies. So, the best in a column has a rank of 1, second best is 4, all the way down to 100 for the worst. We then had a figure we could average to create an overall score. Each measure is given the same weighting in our overall score.
For Analyst Rating, we assigned a 5 for Gold-rated funds, a 4 for Silver, a 3 for Bronze, a 2 for Neutral, and a 1 for Negative. It's worth noting that this is affected by which funds we cover for a fund company, though in each case we are covering their biggest and most important funds.
For average manager investment, we use the midpoint of a reported range to come up with an overall average. Thus, if a manager is reported to have invested between $100,000 and $500,000 in his fund, we would assume he had $300,000 in his fund.
The five-year retention rate is a figure FundInvestor readers probably know well, as it debuted in these pages when I first wanted to measure how well fund companies are retaining their managers. We look at all the managers at a firm at the beginning of the year, then measure what percentage are still there at the end of the year, and then average that figure over five years. The measure was later adopted as a component of our Stewardship Grades.
In consulting and industry circles, stability of management is often considered the best measure of investment culture. If managers are heading for the exits, it usually means there are some big problems at the firm. Creating a healthy culture where very skilled and sought after investment professionals want to stay for their whole career is one of the hardest things to do in the money management world.
As you may have noticed, I made one big tweak to the data for this year’s rankings. I dropped in Analyst Ratings that we didn't have a year ago in place of stewardship. Because manager investment and retention are key components of stewardship, they are rather redundant. Analyst Ratings, however, are fundamental-driven ratings of a fund's prospects and thus nicely capture investment skill and make a nice flip side to the category performance ranking, which tells you where a fund company has been.
This time around the rankings got harder because weaker players Putnam and AllianceBernstein have fallen out. First Eagle is the newest member of the 30 largest fund companies and takes a spot of pride in the list.
Click here to see the results of our rankings.
Dodge & Cox and T. Rowe Price Lead
If your main gauge of a fund company is its recent performance, I may have surprised you with results that show Dodge & Cox on top. They have weak five-year returns though both shorter term and longer term are quite strong. It has a strong investment culture that places Dodge in first place on Analyst Ratings, tenure, average manager investment, and five-year retention rate. Take a look at how much further it is ahead of American, which took second place on some of these measures. It has an average manager investment of $1 million versus $413,000 for American. Its tenure is 22.2 years versus 17.8, and its retention rank of 98.3% bests American’s of 96.9%.
T. Rowe Price, on the other hand, scored well on all measures but didn't finish first in any. T. Rowe has topped these rankings in the past, and it's easy to see why. It's focused on consistency and moderating risk. When a fund manager leaves, you can rarely tell the difference from the portfolio of the new manager. It really sets the standard on manager transitions. In fact, this summer it announced that Preston Athey will step down from T. Rowe Price Small-Cap Value PRSVX in 2014. That's advance planning.
Meantime, First Eagle's successful blend of caution and value has attracted legions of investors so that it actually has more fund assets under management than Putnam. It tops our performance ranks though its manager tenure is middling due to an exodus of the IVA founders a few years ago and Jean-Marie Eveillard's retirement. Current managers Matt McLennan, Abhay Deshpande, and Kimball Brooker have had tremendous success applying their predecessor's approach in the ensuing years. Now they just need to discover management fee breakpoints, as First Eagle Global SGENX is one of only two funds with more than $30 billion in assets charging more than 1% in expenses.
In fourth is American Funds despite weak five-year results. American scores highly on three key measures: tenure, average manager investment, and five-year retention rate. Those results are big positives for shareholders of American, as it shows that managers aren't throwing in the towel despite sluggish returns and sizable outflows. As a result, there's the potential for solid results in the future.
Next come Franklin Templeton and MFS, which score well across the board but don’t lead the way on any key data point. Both firms boast a wide array of skill sets in different asset classes, though Franklin Templeton has been in decline on the foreign-equity side.
Following them are Harbor and Vanguard. Harbor does a fine job of picking strong subadvisors such as PIMCO and delivering them at a decent price. They are quite patient with subadvisors as illustrated by the slumping Harbor International Growth HAIGX. While that may look ugly, remember they stuck with Hakan Castegren through a slow patch at Harbor International HAINX and the fund rebounded to brilliant performance.
If I were creating purely subjective rankings, I'd probably have Vanguard first; in fact, our Analyst Ratings have it third. It is average manager investment and manager tenure that hold Vanguard back. They are really a reflection of Vanguard's unique setup and, to me, not as worrisome as they would be at other firms. Vanguard has a lot of index funds and a lot of plain-vanilla bond funds that are nearly index funds. Vanguard understandably will have one manager running a number of them, as one can be pretty efficient with these sort of funds.
If a manager is running six funds, it's tough for him to invest a large sum in each. Moreover, it's a safe bet that Vanguard's index and quasi-index fund managers are paid less than the top people at other big firms who may well draw eight-figure salaries. To put it another way, I'm not concerned by Vanguard's position on this list.
Back in the Pack
Janus certainly has fallen down this list, hasn't it? A few years ago it was threatening to move into the top echelon, but since then performance has ebbed and a number of key managers have hit the road, including some in August. Thus, category performance and manager tenure rankings are dismal for the shop that always seems to run hot and cold.
Fidelity's performance has actually picked up to a respectable level. However, it comes in last in average manager tenure and has a subpar five-year retention rate. This was partially by design, as Fidelity has switched a number of its funds to multimanager formats where sector specialists pick within their sector. As always, there's a lot going on at Fidelity. Its bond funds are strong, while foreign stock remains unimpressive.
The bottom three slots go to Hartford, Principal, and Goldman Sachs. I mentioned earlier how poor performance and low retention go hand in hand. Here you can see how that negative cycle works as good managers flee for better opportunities and weaker ones are let go for poor performance, thus leading to higher turnover than at most firms. Once that cycle starts, it's hard to stop it. Hartford took the dramatic step of moving all its funds to Wellington in response to poor results at many of the funds not run by Wellington.