How the 30 Biggest Fund Companies Stack Up
Some fund shops were consistent leaders or laggards.
Fund Spy
Last year, I updated you on fund company performance trends. The year before that, I updated you on manager retention at the largest fund companies. This time around, I figured, what the heck, let's look at both, along with manager tenure, manager investment levels, and Stewardship Grades, to get a handle on the latest indicators, from the 30 largest fund companies. To see the rankings, click here.
Investors tend to think purely in terms of individual funds, but it pays to look at the bigger picture. A fund is much more than a sole manager picking stocks. Analyst staffs play a big role, too, as do traders. Looking at firmwide performance helps you gauge how well they are doing. And a fund company's stewardship strengths and weaknesses influence each individual fund's long-term performance.
All this number crunching serves another purpose: It helps you get past the spin. Fund companies want to make the case that they are hitting on all cylinders and everything is peachy. But the data often shows that's not the case. In fact, I found that a few fund companies scored highly on all or most of the measures while a few consistently lagged. When the data screams out like that, you don't want to ignore it.
How We Crunched the Numbers
I've pulled together a lot of data here, but it's really not all that complicated. It will help you understand how a fund company is doing. I've ranked the fund companies from one to 30 on each data point to make it easy to see how they stack up.
I began with asset-weighted relative performance for the trailing three years ended May 2010. Putting up good performance at a tiny mutual fund shouldn't cancel out failure at a giant fund. Thus, we weight the figures based on the average asset size over the time period we're measuring. We used the three-year performance rankings for each firm. While longer-term returns are more meaningful for an individual fund, I wanted to take the pulse of the fund company's current lineup.
We also calculated the average Stewardship Grade for the mutual funds in the family. Not surprisingly, the performance rankings were much more volatile than the Stewardship Grades.
Two measurements relate to the depth and experience of the firm's management team. Look at just about any successful firm and you'll see stability, experience, and cohesion. They are kind of a statistical measure of culture. We look at manager-retention rates over a five-year period. We pull together all the managers listed for a fund complex at the end of each year and then see how many have departed by the next year. We average those yearly changes in order to take a big picture of firm stability. We express this in percentage terms to tell you what percentage of a firm's managers stayed from one year to the next.
The second measure is average manager tenure. Now that we know the percentage of managers who stick around, we want to know how experienced they are. Tenure is not identical to experience, because the tenure clock starts when managers arrive at their funds rather than when they start managing money or enter the investment profession. That's why I included manager retention.
Another measure is manager investment. Who knows a mutual fund's prospects better than the manager? This data tells us about which managers put their money where their mouths are. Because investment levels are reported in ranges, we assigned a midpoint of each range and then averaged those midpoints to find overall investment levels.
Management Standouts
Dodge & Cox and American are considered to have two of the best cultures in the fund world and you can see why when you look at their manager-retention rates. American has a nearly 99% retention rate, and Dodge has a 97% rate. The firms offer ownership stakes to managers and analysts, they focus on their long-term contributions rather than whether they had a great quarter, and they attract great people. While performance at both firms has dipped in the past three years, these figures illustrate why they are good bets to come back. In fact, Dodge had a very strong 2009. The two are also in the top five for manager tenure. That shows that they've had a high retention rate for more than just the past five years. T. Rowe Price and Vanguard had impressive numbers, too, with 94% and 92% retention rates.
Dodge & Cox and Franklin Templeton are tops for manager tenure. Franklin also has a manager-retention rate that is more than 90%. It hasn't had quite the continuity that Dodge and American have, but it still has some very experienced managers and has enjoyed a satisfying level of stability. However, Franklin's Mutual Series unit lost a couple of good managers to PIMCO last year.
Performance
PIMCO and Harbor led the way on asset-weighted three-year performance. PIMCO has a couple of strategies that factor into a wide variety of funds, so when those funds are on the money, the whole firm looks good. The asset-weighting means that PIMCO Total Return (PTTRX) dominates their figures. Harbor has a number of PIMCO-subadvised funds, but it also has enjoyed strong three-year performance at stock funds such as Harbor International (HAINX) and Harbor Capital Appreciation (HACAX).
Numbers three and four are comeback kids Janus and MFS. The pair are growth shops that were too aggressive and got burned in the 2000�02 bear market. They endured management turmoil amid dramatic overhauls aimed at improving the quality of their research. Both have accomplished that mission, though investors are just starting to take notice. It's telling that both have improved on manager retention, too, though they have a ways to go before they top rankings there.
Oppenheimer and AllianceBernstein take up the bottom of the performance rankings. Oppenheimer has been stung by awful performance at its muni- and taxable-bond funds. AllianceBernstein stayed with a big financials bet in its U.S. and foreign equity funds at a great cost in 2008, though its longer-term record is better than that.
Stewardship
Our Stewardship Grades have been pretty stable over the past three years. Dodge & Cox, T. Rowe Price, American, and Vanguard are the only ones that have greater than a B average. On the downside, Wells Fargo and Putnam are near the bottom.
We look for strong culture, good boards, sound manager incentives, low fees, and clean regulatory records in assigning Stewardship Grades. That they are persistent is an encouraging sign that Stewardship Grades can guide you to firms that will continue to be responsible stewards for years to come.
The Big Picture
To get a simple reading on this pile of data, I created a score that's average of each fund company's ranking on each data point, and then I ranked that. This gives you an idea of who is hitting on all cylinders and who is misfiring on many. I would be particularly eager to invest in those at the top of the list and avoid those near the bottom.
T. Rowe Price comes out on top, with American, Dodge & Cox, and Vanguard close behind. You can see that there's a virtuous cycle at work as healthy culture and performance help the other, just as there's a negative cycle that's tough to break for firms near the bottom. These fund companies have been able to build up tremendous competitive advantages and put them to work in ways that deliver strong results for investors. Although Dodge and American have pedestrian three-year figures, their long-term numbers are outstanding.
Two that seem to be on the way up are MFS and Janus. As they rise on this list, they are worth a closer look. While Janus has put up great returns, MFS has made more strides toward management stability.
Note on the Data
This is an updated version of an article that originally appeared in Morningstar FundInvestor.
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