How Much Money Is Your Manager Really Running?

Because they swim in the same pond as giants like PIMCO's Bill Gross and Fidelity's Will Danoff, managers like Mohamed El-Erian, who oversees approximately $2 billion at  PIMCO Emerging Markets Bond  (PAEMX), and Tom Marsico, who runs approximately $4 billion at his two funds, are bound to look like guppies by comparison.

But are they really the small fry that their funds' asset tallies suggest? Not nearly. For instance, El-Erian manages more than $20 billion in emerging-markets debt, meaning that the fund represents just a fraction of the total money he invests. The same basic story holds for Marsico, who oversees approximately $30 billion in total assets.

While that information might seem trivial, it's actually quite relevant in that it provides a more complete picture of how much money each manager runs. Why would you care how much your favorite manager runs outside of the fund that you've got your eye on? Well, consider this example: You buy a small-cap fund with $100 million in assets, thinking that the manager should be able to execute the strategy--buying smaller, potentially less-liquid small-cap stocks--without too much trouble given its modest asset base. But guess what? That same small-cap manager oversees an additional $3 billion in identically managed separate accounts. What that means is that every time the manager trades, he runs the risk of moving the market, incurring hefty transaction costs in the process. So, instead of investing with a manager who's fleet afoot thanks to a manageable asset load, you've cast your lot with a guy who's carrying an elephant on his back.

Given this, it should come as no surprise that, in analyzing an investment strategy employed at a fund, Morningstar analysts routinely consider not just the amount of money the manager is running in that fund, but also the total managed in the same style across other accounts. Until recently, investors typically had to scratch and claw in order to obtain that kind of information, if it could be had at all. More often that not, investors have had to take the fund family's word for it when the company said it would close funds in a timely manner to avoid overburdening talented managers with assets. In other words, fund firms simply said, "Trust us." Unfortunately, fund companies haven't done much to earn the faith they've asked investors to place in them. For every  Wasatch Ultra Growth (WAMCX) (which closed before fund assets eclipsed $500 million because total assets in the strategy had reached approximately $1 billion) there are probably a dozen other funds that are allowed to grow too large.

Fortunately, a new SEC regulation shines more light on this opaque area. Mutual funds must now disclose how much money each manager of a fund is involved in overseeing, including both funds and separate accounts. This data, which is gradually becoming available to investors through funds' Statements of Additional Information (SAI), typically appears in a section entitled "Other Accounts Managed," or some variation thereof.

Already, some interesting details have emerged. For instance, Dodge & Cox's recent filings reveal the amount managed by each member of the funds' investment committees. Notably, each member involved in running the $43-billion  Dodge & Cox Stock (DODGX) also contributes to at least one of the firm's other funds, and also does some work on the separate-account side. That said, none of these folks has more than $6.5 billion in separate account assets under management, which isn't an alarming figure given the firm's deliberate investing style. Interestingly, some of the firm's fixed-income managers oversee even loftier amounts on the separate-account side.

The data is also particularly useful when you're examining firms, such as Vanguard, that employ a large number of external subadvisors. Take  Vanguard Wellington (VWELX), for instance. That $34-billion fund's portfolio is comanaged by Wellington Management's Ed Bousa, who does the stock-picking, and Paul Kaplan, who assembles the fund's bond portfolio. But upon closer review of the fund's SAI, investors will find that Bousa runs an additional $10.5 billion outside of Vanguard Wellington, while Kaplan manages an additional $25 billion besides the fund. Given that the duo focuses primarily on very liquid securities (Bousa sticks mainly to blue-chip stocks while Kaplan invests in a wide variety of investment-grade bonds), the fund's size isn't staggering. But when the fund's assets are taken together with the other money that the managers oversee, it more vividly highlights the challenges they face in putting all of that money to work.

Of course, not all of the disclosure has been quite that illuminating. For instance, American Funds' advisor, Capital Research & Management, isn't breaking out the assets that each of its portfolio managers is specifically responsible for running. Instead, Capital has opted to disclose the total assets of whatever funds a manager runs a piece of. For instance, per a recent filing, Michael Shanahan runs three funds whose total assets amount to $189.9 billion. But that number far overstates the amount that Shanahan actually manages, since he's responsible for only one portion of each of those three funds. In fact, a footnote to the disclosure warns that the asset figures cited aren't "indicative of the total assets managed by the individual, which is a substantially lower amount." If that's the case, why not disclose that substantially lower number?

True, American's approach conforms to the letter of the SEC's new regulations (which were actually instituted in order to help investors assess conflicts of interest that might arise when a manager oversees multiple accounts), as those regulations merely required funds to disclose the total assets in each other account managed. But breaking down the amount each manager was actually responsible for would give investors a more meaningful sense of whether they were nearing their capacity.

But, on balance, I think the new disclosure at least represents a step in the right direction.

Fidelity Boosts Freedom Lineup
A few weeks ago, we wrote about what we perceived to be some shortcomings with Fidelity's lineup of target-retirement Freedom funds. Last week, however, the firm announced some changes that partly assuage our concerns. In particular, the firm is doing away with the management fee overlay on these funds of funds and introducing some dedicated small-cap exposure to their portfolios. Both are positive steps, and we think the funds' shareholders will be better off for it.