During the high-spirited year of 1998, Kinetics Internet fund returned 196.1 percent. Boasting such mind-bending results, Ryan Jacob, the young portfolio manager, became a media celebrity. Magazines ran glowing profiles of the star. Interviewers plied him with questions about his views on technology stocks. The attention died away when the fund collapsed along with other technology portfolios. For years, Jacob disappeared from the media. So what has Jacob been up to lately? He now runs Jacob Internet, a fund that ranks No. 1 in the technology category with five-year annual returns of 25.4 percent. Those are good results — even if we were back in the 1990s. But this time the media is barely paying attention. A Google search of Jacob reveals only a few mentions.
Jacob's case is hardly unusual. While there were plenty of celebrity fund managers in the 1990s, today the stars have (mostly) vanished. Casual newspaper readers may be able to name Legg Mason's Bill Miller or PIMCO's Bill Gross. But they would be hard-pressed to think of other famous managers. What has happened? In part, the media simply sobered up. After the Internet stocks collapsed, reporters became less eager to anoint managers “geniuses.” Investors also seem less inclined to go ga-ga over individual managers.
But the pendulum has swung too far. In an era when the hottest-selling choices include exchange-traded index funds, the media and investors may be giving too little attention to genuine star managers. True stars have always been rare, but the species is far from extinct. “The manager is important because that is the person making the decisions,” says Jeff Tjornehoj, senior research analyst for Lipper. “We still have outstanding active managers.”
The lack of emphasis on managers could be partly due to temporary conditions. After the great turbulence of 2000 and 2001, the market began to settle into a calm state. In 2005, volatility reached its lowest level in a decade, according to Goldman Sachs. During this time when stocks were smoothly heading upwards, the results of many funds clumped closely together. It was hard for a manager to stand out from the crowd. That appeared to be changing on Feb. 27 when the Dow Jones industrial dropped more than 400 points in a single day. If the market is truly returning to a more normal state of volatility, the gap between top performers and also-rans will grow. The best managers could regain some of their lost prestige.
Change Is Good — Or Not Always Bad
How much does the manager typically matter? To find out, Klaas Baks, a professor at Emory University, looked at the markets of the 1990s, when volatility was around historical averages. The researcher examined funds after a manager change. In many cases, he found that the change had little impact. What mattered most was the fund's organization and trading desk — not the manager. But there were instances when the shift in managers seemed to have a clear effect. When a fund switched overseers, returns could shift substantially, and up to 50 percent of the change in results could be attributed to the impact of managers, says Baks.
The study suggests some guidelines for advisors who are trying to size up funds — or deciding whether to keep a longtime holding after a manager change. First, be aware that the fund universe can be divided into two groups: funds where the manager doesn't matter much, and funds where the manager has a distinctive style that can be hard to replace. Both kinds of funds can be useful, but advisors need to be clear about where their choice fits on the spectrum. A key indicator can be R-squared, the measure of how closely a fund tracks a benchmark. For a large blend fund, a score of 100 indicates that the portfolio precisely correlates with the moves of the S&P 500; a score of 85 or lower indicates that the large-cap fund makes some effort at taking a distinctive approach. Cautious investors may well prefer a fund with an R-squared figure of 95. Such a fund will not hit homeruns, but it will not strike out either. If the conservative fund changes managers, there may be little reason to sell.
If a large blend fund has an R-squared of 80, then the manager is placing bets that can go wrong. You should only own the fund because the manager seems likely to justify the risk with above-average returns. If the fund replaces its risky manager, you may only want to hold it if the substitute has a long track record for delivering solid returns while deviating from the benchmark.
Here are some recent cases of manager changes and how experts decided whether to continue holding. An example of a keeper is Clipper, says Baie Netzer senior analyst at of Litman/Gregory Asset Management. The fund changed managers in 2006. Under the old team Clipper was a concentrated portfolio, holding about 20 value stocks — no one could accuse the managers of hugging the index. When the S&P 500 sank into the red in 2000 and 2001, Clipper delivered double-digit returns. With the replacement team of Chris Davis and Ken Feinberg, the fund remains a highly concentrated portfolio that does not resemble a closet indexer. “We were thrilled when they took over Clipper,” says Netzer, who says that the team has a long record of managing Davis New York Venture, outdoing the index by picking undervalued blue chips.
Another fund that still appeals to Netzer is TCW Select Equities, which lost its longtime lead manager Glen Bickerstaff in 2005. A concentrated portfolio, TCW often placed outsized bets on particular industries. Under the new team of Craig Blum and Stephen Burlingame, the fund is keeping its old ways, holding about 30 stocks and maintaining big overweights in several sectors, including technology and business services.
Netzer sometimes looks at funds with poor track records that hire new management. Last year she applauded when Old Mutual Emerging Growth turned the reins over to Tucker Walsh, who has a strong record managing small growth stocks.
Vanguard Group has a solid reputation for picking strong subadvisors (outside hired guns), says Ross Levin, president of Accredited Investors, a financial advisor in Edina, Minn. Vanguard picks managers with distinctive styles and long records of outperformance. Vanguard Windsor II recently shifted assets to Christopher Blake of Lazard Asset Management, while Vanguard Morgan Growth recently replaced a manager with Kathleen McCarragher of Jennison. Says Levin: “You can trust Vanguard to make the right choices.”
UNDER NEW MANAGEMENT
After changing managers recently, these funds seem poised to excel.
|Fund||Ticker||Category||1-Year Return||3-Year Return||5-Year Return||% Rank 5-Year Return||Maximum Front-End Load|
|Old Mutual Emerging Growth A||OAEGX||Small Growth||2.3||4.4||0.2||97||5.75|
|TCW Select Equities||TGCEX||Large Growth||-3.4||3.8||3.5||50||0|
|Vanguard Morgan||VMRGX||Large Growth||8.7||10.1||7.4||11||0|
|Growth Vanguard Windsor II||VWNFX||Large Value||17.2||14.0||10.9||14%||0|
| Source: Morningstar |
Returns through 1/31/07.