When Bill Gross, the “Bond King” and co-founder of Pacific Investment Management Company, left that firm for Janus Henderson Investors in 2014, client assets left with him. His departure immediately harmed the outlook some investors had in the performance of the flagship total return fund he managed, and they pulled out billions.
But not Phillip Huber, the chief investment officer for Huber Financial, who said on Wednesday at Morningstar’s annual investment conference that his firm chose to remain in the PIMCO Total Return Fund (PTTRX) because it had invested with PIMCO, not just the fund’s manager—a lesson he and other panelists hoped advisors would take home with them. The fund didn’t suffer performance-wise. It’s had a 1.99 percent return over the past 3 years, compared to 1.58 percent for its benchmark, the Barclays US Aggregate Bond Index, according to Morningstar—not a mean feat considering the rise in rates managers have to contend with.
“Ultimately, we had a lot of conviction in PIMCO as a firm,” Huber said. “It’s not often that the biggest bond fund in the world is a contrarian play.”
An increasing number of advisors outsource investment management and they consider many factors when choosing a firm to do it. But those factors should rarely be the reputation, or “rock-star” persona, of an individual manager, the panelists said. Better to look at the overall firm, it’s people, processes and executive management.
“You need to really understand the firm beyond the name of the fund,” said Michelle Ward, an associate portfolio manager at Morningstar Investment Management. When looking at particularly esoteric asset classes, Morningstar Investment Management favors managers than have been in the business for at least 20 years, ones that have invested through market cycles and have a proven track record. The firm also tries to stay away from the “hottest” new products and strategies until they’re proven in the market.
A manager’s rolling returns over time are also what investors should pay attention to, rather that their performance during certain periods. Ward said some investors might want to evaluate a manager based on their performance during the financial crisis, which she said is misguided. A manager who performed relatively well in 2008 and 2009 might have just been lucky. A good year or two isn’t necessarily the mark of a good manager, she said.
Despite the advice of the panelists, Morningstar’s Director of Mutual Fund Research Russel Kinnel implored them to share who some of their favorite managers are. Ward did give one individual name. She pointed to Oakmark Funds’ David Herro because of—yes—his track record, but also because of his management: The funds have performed even as other managers he’s worked with have come and gone. The team, strategies and structure are all in place so that if someone leaves, it doesn’t devastate the performance.
Still, Ward also cautioned advisors not to “fall in love with the managers you’re using.” Red flags to watch out for might be changes in strategy that begin to impact a fund negatively and a high turnover of analysts or traders, Ward said. Funds that begin investing in sectors they weren’t previously could end badly too, she said.
Anna Snider, the head of due diligence for Merrill Lynch’s Global Wealth and Investment Management CIO Office, said she would be reluctant to name a favorite manager. “I’ve had my favorites,” she said, “and have been burned by them.”