When active management means many managers
NEW YORK — Like those amoeba you learned about back in high school science class, mutual-fund managers are multiplying.
It's not just new managers for new funds. But also co-managers, multiple managers, managers who are also analysts, and managers of managers.
The Master's Select Equity fund, for example, has six managers. The Franklin Templeton Dynatech Fund has two managers, though last year it had three. The Stein Roe Young Investor Fund has two managers.
The State Street Research Galileo Fund has at least 14.
"A few years ago, funds were reluctant to admit that they used more than one manager on a fund," says an analyst with Morningstar Inc., a financial-services information firm in Chicago. "They didn't want you to know that the fund had more than one person running the show.
"Now that has all changed, as the concept of multiple managers has become popular," she says.
According to Morningstar, some 1,398 single-class equity funds out of a total of 2,691 single-class funds, or 52 percent of the total, now have multiple managers. Of the 2,731 single-class international equity funds tracked by Morningstar, some 1,297, or roughly 47 percent, have more than one manager.
Reasons for using multiple managers vary. The three most-common ones:
Diversification Having more than one manager enables a fund to broaden its portfolio base by using experts familiar with certain segments, or subsegments, of the market.
Better leadership When manager A is out of town, manager B, or C, or D can run the show. As a result, investors should sleep better, knowing there is always someone on the deck of the ship.
Marketing Let's be honest. Some fund companies use multiple managers "as a marketing gimmick," touting the concept in their advertising, says the Morningstar analyst.
Perhaps the best-known group to use more than two managers is Litman/Gregory Fund Advisors, which runs two highly successful funds: the Masters' Select Equity Fund and the Masters' Select International Fund.
Both funds are up more than 100 percent since their inception in the late 1990s, notes John Coughlan, chief operating officer of Litman/Gregory Fund Advisors, based in Orinda, Calif.
In the case of the Masters' Select Equity Fund, for example, there are six managers, Mr. Coughlan says.
Here's how they work together: Twenty percent of the fund is run by the manager of the Legg Mason Value Trust Fund, Bill Miller, who focuses on large-cap companies (though he has a mandate to buy whatever grabs his fancy); Shelby Davis and his adult son Chris also look after 20 percent, investing in large-cap growth companies that have "reasonable value;" Foster Friess handles 10 percent, picking small- and mid-cap stocks; Mason Hawkins runs 20 percent by investing in traditional value stocks; Sig Segalas oversees 20 percent, focusing on large-cap growth companies; and Dick Weiss runs 10 percent, searching out reasonably priced small-cap growth companies.
Each of the six managers is allowed to pick his favorite stocks. "They are not overruled on their choices," says Coughlan. The total portfolio for the fund tends to average around 65 companies, he says.
Some funds have even larger numbers of managers. For example, the State Street Research Galileo Fund has one overall manager - Tom Dillman - and 14 co-managers. The co-managers also serve as the funds' 14 equity stock analysts.
To ensure that they do their very best possible work, the Galileo fund rewards the co-managers for making solid choices. One-fifth of the co-managers' respective bonuses is based on how well their stock picks perform versus other stocks in their area of coverage.
The jury is still out on whether funds with many managers do better than single-managed funds, since reporting agencies such as Morningstar have only begun considering the role of co-managers in the past few years.
Still, the assumption is that co-managed funds tend to be on the plus side in terms of returns, simply because they have an extra layer of research and expertise that most single-managed funds may not have.
That may particularly be true for funds with many stocks in their portfolios, experts say.
More and more, the 'two heads are better' philosophy reigns. One fund even has 14.
(c) Copyright 2000. The Christian Science Publishing Society