Manager Rivalries in the Fund Industry

Although it doesn’t match the intensity or following of Red Sox versus Yankees in baseball, or Duke versus North Carolina in college basketball, the mutual fund industry is rife with competition. Morningstar Manager Research Analysts often examine a fund manager relative to their benchmark and peer group, yet some managers measure themselves against past coworkers. And while top managers are often highly motivated, well compensated, and entrepreneurial, competing with a former boss or protégé may add extra incentive.

In such cases, there’s an incumbent and a prospect. Challengers hold a few advantages. First, they have a specialized investment universe from their previous work. Indeed, many former subordinates share several names with their old employers. New managers with smaller asset bases can also nimbly reposition around best ideas. Yet there are benefits to scale. Entrenched managers typically claim hulking asset bases and therefore spend less time on administrative tasks. Incumbents are also well resourced, boasting talented analyst benches and dedicated portfolio specialists. New managers, on the other hand, need to build their own asset base, which takes them away from portfolio management. Moreover, they need to recruit and form their own supporting casts.

We’ve highlighted a few examples of incumbents versus prospects below. Certainly, this is just a sampling and not a comprehensive list. There are numerous other instances, both current and historical, of colleagues becoming competitors. To account for fees, similarly distributed share classes were used for the returns quoted below. For example, the investor share class was used for Oakmark International OAKIX and Artisan International Value ARTKX , which helps Oakmark since it levies lower fees.

Oakmark International and Artisan International Value David Herro has led Oakmark International since 1992 and managed former analysts David Samra and Daniel O'Keefe from 1997 to 2002. Samra and O'Keefe left Oakmark to start Artisan International Value, with Samra serving as a portfolio manager since the strategy's September 2002 inception. O'Keefe started as an analyst and joined the management roster in 2006. Samra and O'Keefe's success ultimately led to their separation in 2018: Samra became lead manager of Artisan International Value, which sports a Morningstar Analyst Rating of Silver, and O'Keefe dropped off, while O'Keefe became lead manager of Silver-rated Artisan Global Value ARTGX and Samra stepped down. Herro, meanwhile, remains an industry titan; he has produced an unprecedented 27-year track record at Oakmark International, which earns a Gold rating.

Both Herro and Samra are disciplined, valuation-sensitive managers, but not “cigar-butt” investors. Herro is more contrarian, seeking companies with solid top-line growth and free cash flow generation, but near-term headwinds. Samra, too, is a high-conviction manager, but he employs a more-conservative relative value approach, targeting firms with modest leverage and discounted valuations. And even though these managers haven’t worked together in 17 years, there’s still some name overlap, including: Lloyds Banking Group LLOY, held since 2011; Samsung Electronics SSNGY, Samra’s top holding as of June 2019; and NAVER NHNCF, purchased last year.

Artisan International Value’s 11.6% annualized return bested Herro and the MSCI ACWI ex USA benchmark from its September 2002 inception through September 2019. Samra’s strategy fares similarly on a risk-adjusted basis as Herro’s contrarianism has generated big performance swings. That said, Herro’s also delivered exceptional returns. Oakmark International’s 9.0% annualized gain over the same stretch tops the bogy by 1.2 percentage points.

Since Samra and O’Keefe now run their own shows with separate resources, there’s a budding rivalry between them, too. While their investment mandates and benchmarks differ, they’re undoubtedly keeping tabs on one another. Samra’s off to a better start, although it’s only been a year since their Oct. 1, 2018, split. His Artisan International Value fund’s trailing one-year return beats its respective bogy and foreign large-blend Morningstar Category norm, while O’Keefe’s Artisan Global Value lags both the MSCI World benchmark and average world large-stock category peer. It’s too early to declare victory, but some friendly in-house competition could benefit investors in both strategies.

Morgan Stanley Institutional Global Opportunity MGGIX and Baron Global Advantage BGAIX Kristian Heugh and Alex Umansky cut their teeth at Morgan Stanley together, eventually serving as comanagers on several global and international strategies. Yet their partnership didn't last. Umansky joined Baron Funds in 2011 and launched Baron Global Advantage the following year, leaving Heugh to steer Morgan Stanley Institutional Global Opportunity. Baron Global Advantage is included on Morningstar Prospects, a list of investment strategies that Morningstar Manager Research thinks might be worthy of coverage, while Morgan Stanley Institutional Global Opportunity graduated from the list last year with a Bronze rating.

Heugh and Umansky are aggressive growth managers, seeking companies with sustainable competitive advantages and below-average debt. Their enterprising approaches have led to regular forays into Chinese equities. Sector allocations, too, stray from category peers, with hefty stakes in technology and consumer-discretionary names. There are subtle differences, however. Heugh eschews biotechs while Umansky has piled in recently. Both managers like U.S. tech stocks, but Umansky has Amazon AMZN, Alphabet GOOG, and Facebook FB as top-five holdings, as of June 2019. Heugh counts all three as top-15 holdings, too, but also likes payments firms Mastercard MA and Visa V. Umansky hasn’t held either Mastercard or Visa since 2014.

Heugh holds the upper hand over their shared tenure. Since Umansky launched Baron Global Advantage in April 2012, Heugh’s Morgan Stanley Institutional Global Opportunity’s 16.1% annualized return through September 2019 tops Baron Global Advantage and the MSCI ACWI Growth benchmark by 2.3 and 6.1 percentage points, respectively. Heugh’s outperformed on a risk-adjusted basis, too, although both managers court more volatility than the benchmark. That said, Baron Global Advantage’s 11.0% trailing 1-year return led the world large-stock category and beat both Heugh’s fund and the index by over 8 percentage points.

Brown Capital Management Small Company BCSSX and Alger Small Cap Focus AOFIX Amy Zhang served as a comanager at renowned Brown Capital Management for a dozen years. There, she helped Gold-rated Brown Capital Management Small Company to one of the best records not only in the small-growth category, but among all U.S. open-end funds. Then, in 2015, she bet on herself, building her own strategy at Fred Alger Management from the ground up. Brown Capital Management Small Company, on the other hand, continued its remarkable run, thanks to firm president Keith Lee's tremendous leadership and skilled comanagers.

As with the others, there’s some overlap and some differences between the two processes. Rather than looking at market cap, both Brown Capital Management and Zhang home in on operating revenue. They seek disruptive firms capable of simplifying or saving lives. Indeed, both strategies invest over four fifths of assets in two sectors--technology and healthcare. The two strategies also shared 21 names as of June 2019, with both counting Veeva Systems VEEV and Cognex CGNX as top-three holdings. The Brown Capital Management team has held Cognex since 1993. There are some variations, though. Amy Zhang defines small companies as those with operating revenues less than $500 million, while the Brown Capital Management team uses $250 million as their threshold.

Through September 2019, Brown Capital Management Small Company edges Zhang’s Alger Small Cap Focus, which carries a Silver rating. Its 14.8% annualized return since Zhang’s February 2015 start date beats Alger Small Cap Focus’ 14.4% and performs similarly on a risk-adjusted basis. Still, both strategies are doubling the Russell 2000 Growth Index’s 7.1% return over the same period.