When Process Trumps People

Warren Buffett is often quoted as saying, "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

With a little massaging that stock-picking maxim can apply, at least in part, to selecting mutual funds. Investing success depends a great deal on the intelligence, temperament, and judgment of the people doing the investing; few, if any, approaches are completely simpleton-proof. Still, buying a fund with a disciplined, enduring investment process that can be repeated by successive generations of managers or investment teams can insulate shareholders from the risk of the next manager of their fund turning out to be a dunderhead.

To find a few possible examples, I screened Morningstar's Medalist funds for those that had Positive scores for each of the Pillars holding up their Morningstar Analyst Ratings--except for People. To eliminate those with Neutral People Pillars because of wholesale manager changes (a common reason for a middling People score), I further sifted among the surviving funds for those with average manager tenures of at least five years.

What was left was a handful of funds with processes and parents that, while not completely impervious to change and folly, at least have sound enough approaches and parents to mitigate the risk of foolishness.

Spartan Living

Passive investing isn't as dummy-proof as it sounds. Tracking an index accurately day in and day out requires a great deal of technical skill, attention to detail, and drive to squeeze out every drop of cost possible from every trade. It pays to have managers and traders who know the ins and outs of futures markets and have the systems in place to stay on top of corporate actions as well as the benchmarks of their asset classes. Passive funds still can survive more managerial ambiguity than active funds, though. That's why Fidelity Investments' broad equity index funds still earn Analyst Ratings of Gold and Silver while getting Neutral People scores. Geode Capital Management, which subadvises

The Handoff

A likely future managerial handoff keeps

Thoroughgoing

American Beacon's thorough manager-selection method earns a Positive Process rating for

House Rules

Some mild manager reshuffling over the years has led to