Taking Fund Rivalries in the Right Direction
Better to focus on shareholders than on trashing former colleagues.
Better to focus on shareholders than on trashing former colleagues.
The court case in Los Angeles pitting DoubleLine founder Jeffrey Gundlach and several colleagues against their former firm, TCW, has further raised the profile of an acrimonious split between fund manager and fund firm that had already received much attention.
This affair is unusual. Typically in such episodes, the accusations and mudslinging don't end up in court. Often they don't even get into the media. But the animosity does get aired. Morningstar analysts have heard plenty of portfolio managers who have left to join a competitor or form their own firms enthusiastically bash former colleagues and employers. Advisors being pitched new funds from such managers or their salespeople have likely heard even more of this talk than we have, and with juicier details to boot.
Managers and firms should rein themselves in. Decorum and circumspection might seem quaint in the age of Twitter and TMZ, but professionalism never goes out of style.
He Said, They Said
One of the more memorable splits dates back to the 1990s, when Tom Marsico left Janus. Marsico had been one of the biggest wheels at the firm when it was riding high. The split was not amicable. When Janus continued to thrive, Marsico was quoted in a national magazine boasting that he had trained many of the firm's successful managers, and a Janus manager sarcastically replied that, yes, his former colleague was a superhero who had single-handedly built the entire firm.
Less-colorful but equally harsh are the words Morningstar analysts have heard over the years in our office, at visits to fund-company headquarters, or in telephone conversations. The dismissive stories and gratuitous insults fly. Fund firms accuse departed managers of greed or downplay their contributions, while managers ridicule their former bosses' incompetence or antiquated systems.
Where Should the Focus Be?
One might ask, what's the problem? High-level money management is a competitive field. If the articles and memoirs can be believed, trading floors pride themselves on their rollicking, locker-room atmosphere. Isn't a little trash-talking among former colleagues to be expected? Why not just chuckle and move on?
There are several reasons why fund managers and firms shouldn't adhere to the code of the locker room or, for that matter, the trading floor. One is to maintain--or regain--the confidence of the general public. This isn't a game. People entrust their savings to money managers, hoping to build for the future. Yet scandals among money managers and in corporate boardrooms, along with market gyrations that mystify and disappoint ordinary investors, have dented many people's faith in the markets and in long-term investing. Hearing top-level managers and prominent fund companies trash each others' abilities and ethics can do nothing but further damage the image of money management in general.
That's dangerous. With money market rates practically zero and certificates of deposit paying scant income, investors who hope to raise a college fund and build a sufficient sum for retirement must invest in stocks and bonds. If they turn away, their chances of having enough money to meet their goals--or to provide a cushion during tough times--will be diminished.
Toning down the rhetoric is just the start. Fund managers also must be careful not to let anger toward a former employer or employee influence their actions. A manager who watches the portfolios and performance of his former colleagues with an eagle eye--and whose main goal seems to be to outshine those former colleagues in a certain time period--may make decisions that run counter to his fund shareholders' long-term interests.
Competing So Everybody Wins
It's easy to tell talented and competitive individuals that they should turn into Star Trek's Mr. Spock, behaving rationally and unemotionally no matter how unpleasant a fund-company breakup might have been. But it's not realistic. You can't turn off human nature. However, you can point emotions in a more helpful direction.
So here's a suggestion. Compete all you want--on price. Rarely do we hear fund managers who've been trashing their former colleagues then say, "That's why I'm going to cut my management fee in half. See how they like competing against that!"
Taking a rivalry in that direction, even to a lesser degree, could benefit everyone. It would help shareholders of the manager's fund by lowering their costs. And if the former firm responds by cutting fees as well, still more shareholders would benefit.
Yes, initially managers and firms would earn less money on the assets in the funds, but there's plenty of evidence that most fund managers are in robust financial health. Their lifestyles should be able to withstand the impact for quite a while without much suffering. And it's possible the lower fees would help attract assets.
If all that isn't enough to persuade managers to channel their anger into cost-cutting, there's this: With a lower expense ratio cutting into returns, their funds will have a better chance of beating their sworn enemies in the year-end performance rankings. Sound good? Go for it.
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