Is the Era of the Star Fund Manager Over?

In October, Janus announced that it was filling the void left on  Janus Fund  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.

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.

We've taken a much closer look at fund company cultures as we've assessed more general stewardship-related issues in our  Stewardship Grades for funds. And we've found that the best fund companies know what their core competencies are and structure their organizations and research efforts around them. There may be sensible business reasons for a shift to a multiple-manager system, but we're not convinced that it's bound to work well everywhere.

Take Putnam, for example. Every single Putnam fund has multiple managers on its roster today. It's worth noting that there's a clear lead in some of those cases and in others it's an attempt to blend fundamental research with quantitative tools. Putnam's trouble getting back on its feet after the bear market and market-timing scandal has made attracting promising talent harder. To complicate matters further, the firm has had the worst manager retention rate among the largest fund shops over the past five years (though some of that turnover has been Putnam's doing), and few of its managers boast attractive long-term track records. Multiple managers can't make up for shortfalls or lead to magical results.

Although fund shops like Janus and Fidelity are in better shape than Putnam, we're not convinced that the multiple-manager approach will be the cure for all that ails them, either. That's because they have been built and flourish on competition. A lot of analysts start at Fidelity, and many great ones stick around. In theory, the very brightest then take on sector funds and the best sector-fund managers are tapped to run small diversified offerings. Eventually, the cream of the crop should make its way up to Fidelity's flagships. In that kind of environment, one person's success is largely dependent on another one's failure. Fidelity can dabble with multiple managers running funds on the periphery, but we think it would take a very long time and a real commitment before it could build a culture that buys into such a system and can succeed with it.

At the end of the day, whether one manager is named or 10 are, nearly every fund is a team effort. The star manager phenomenon may seem like it's out of style right now, but we wouldn't close the book on it just yet.