Why Fund Managers Matter Less and Less

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When Fidelity's giant Magellan Fund changed managers a year ago, many shareholders applauded. Under the old manager, the fund produced mediocre results. So how is the new fellow doing? About as well as the old manager. Investors should not be surprised.


Most often, a shift in managers does not produce substantial changes. “Many funds depend heavily on a team of managers and analysts, so the departure of one name does not have a big impact,” says Ross Levin, a financial advisor in Edina, Minn.


To determine the impact of managers, Klaas Baks, a professor at Emory University, looked at fund returns before and after manager changes. Most often, the new skipper made little noticeable difference. Mediocre funds remained in the cellar, and good ones continued their winning ways. “The fund is more important than the manager,” writes Baks.


The academic research suggests that some fund companies have an ability to hire and train top managers. Other companies appear to be hapless—no matter how many times they change managers, their performance lags. Because of the persistent gap between winners and alsorans, investors should evaluate a fund company as well as its managers. Just as you study a manager's track record, you should use Morningstar or other sources to examine how the parent company does with all its funds. Reliable winning companies include Dodge & Cox, T. Rowe Price, and American Funds.


These companies invest heavily in training managers and developing deep benches. If one employee leaves, you can rely on the replacement being able to handle the job. More importantly, the reliable companies rarely have a fund that drops into the cellar. Nearly all their funds produce competitive long-term results. 


The impact of individual managers has not always been so minimal. In the 1980s and 1990s, many managers marched to their own drummers. The most famous was Magellan's Peter Lynch, who scored huge gains by ranging widely, buying small bank stocks one month, and big oil companies the next.


But in recent years, many companies reined in their managers, forcing them to avoid risk and stay within preset investment boundaries. Companies discovered that when a fund suffers big losses, investors flee. In contrast, shareholders tend to stick with steady funds that play it safe and avoid stomach-churning plunges.


To be sure, a few individualistic fund managers continue to compile top records. Tom Marsico, manager of Marsico Growth, often holds an eclectic mix of fast-growing blue chips and unloved value names. William Miller of Legg Mason Value constantly surprises Wall Street with contrarian moves, buying Eastman Kodak when it appeared to be flat on its back and taking on Google when the price seemed astronomical. For shareholders of these individualistic funds, the name of the manager still matters. And if the manager leaves, it may be time for investors to sell the fund.

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