Chuck Jaffe: Whatever Happened To The Heavyweight Mutual Fund Managers?

Ted

FYI: Almost five years ago, when Bill Miller left the Legg Mason Value Trust — the mutual fund he once led to an astounding 15 straight calendar years of beating the S&P 500 — the question was whether the lasting memory of his career would be one of legendary success or epic failure.
Last week, when it was announced that Miller would formally break ties with Legg Mason after more than three decades, the answer was clear: the pains speak louder than the achievements.
Regards,
Ted
http://www.marketwatch.com/story/whatever-happened-to-the-heavyweight-mutual-fund-managers-2016-08-16/print

MJG

Hi Guys,

Heavy weight fund managers do exist, but they do not persist. Yesterday's winners are likely to be tomorrow's losers. That's a fair summary of the historical record that is repeated time and time again.

“So if you can get a couple of decent years together and a decent story and then slide quietly into mediocrity, it’s a recipe for success for your fund company, and a recipe for disappointment for investors.” Thea's not me talking. That's a quote from Professor Snowball.

Fund managers do a terrific job at stock selection that would generate a positive Alpha without integrating research and trading costs into the equation. Most managers can not consistently overcome that frictional drag.

With a very few rare exceptions who can not be identified ahead of time, heavy weight fund managers are a myth. That's a major factor in the increasingly popular passive Index investment strategy. Actively managed mutual funds are becoming an ever decreasing fraction of my portfolio. I tend to apply lessons learned slowly.

EDIT: Sorry, I neglected to include a reference to the article that I extracted the David Snowball quote from. Here it is:

http://www.marketwatch.com/story/90-of-fund-managers-beat-the-market-but-their-shareholders-dont-2015-01-21

Best Wishes.

BobC

There are indeed some "heavyweight" managers out there. Fortunately, most of them are not media darlings. My definition of of "heavyweight manager" is probably different from other folks. I think of them as people who quietly grind away, year after year, seldom making headlines, but continuing to give their funds' shareholders solid returns. There may be an occasional disappointing year, but never a really bad year. And in most cases, these managers let their investors sleep at night without worry. Another reason for fewer heavyweights is that many funds are now run by a team, which is a smart move on the part of fund companies, I think.

rforno

Agree COMPLETELY. To me, a 'heavyweight' manager does not live on TV networks or press coverage, and does not focus on raising their AUM at every opportunity....in fact, hopefully they're fairly anonymous! I hold mutual funds for the long haul (as in "old school" long-term, meaning years and decades) so I want them, like their managers, to be boring, hardworking, and laboring in the background as they grind my money higher in a controlled manner.

BobC said:

There are indeed some "heavyweight" managers out there. Fortunately, most of them are not media darlings. My definition of of "heavyweight manager" is probably different from other folks. I think of them as people who quietly grind away, year after year, seldom making headlines, but continuing to give their funds' shareholders solid returns. There may be an occasional disappointing year, but never a really bad year. And in most cases, these managers let their investors sleep at night without worry. Another reason for fewer heavyweights is that many funds are now run by a team, which is a smart move on the part of fund companies, I think.

shipwreckedandalone

I think the increase in market volatility makes active management increasingly difficult. When a company misses earnings by a penny the stock sells off by 15% or when you buy the right stock at the right price and it does not behave as it should (even if you analyze the equity correctly) because the price is more influenced by the number of ETF's it is held in rather than the quality of the reported earnings.

Edmond

Another 'heavyweight' manager is (was) Ken Heebner. His realty fund is REALLY sucking wind this year, even though the real-estate index is up nicely YTD.

What happens? - The SMART ones leave/quit/retire while on top. Think: Peter Lynch at Fidelity, or (in the entertainment world) Johnny Carson.

Smart folks leave at the top of their careers. Smart folks always leave the crowd wanting more. Smart folks remember the adage of the ancient Romans: "all fame is fleeting'.

shipwreckedandalone

"The SMART ones leave/quit/retire while on top".....nobody did this better than the Beatles.

jstr

Consistent alpha premium has been produced over legendary managers performances through the use of funds focusing on risk factors and the use of tactical factors.
For example, an equal weighted blend of emerging small cap / small cap value / large cap value * allocation made from Nov 1 to Apr 30 ( "Sell in May" tactical factor ) and switched to the utilities sector (or cash) from May 1 to Oct 31. When high risk year is indicated ( quantitative price based variable # 2 ** ( tactical factor / variable )) allocate to cash May 1 - Oct 31.
Thus this process has produced alpha and reduced risk of ruin through the exploitation of:
- market / risk factors ( size = small, value )
- "valuation" risk - emerging markets ("small cap") combined with domestic (small cap value) has reduced "valuation" risk and provided diversification
- low(er) volatility ... Large cap stock universe
- the "Sell in May" "tactical" factor
- risk forecasting for the upcoming year / avoidance of systemic, idiosyncratic market risk statistically occurring in the fall months ( May - Oct period )

Over a 60+ year sample run on the strategy *** ( encompassing different bull and bear cycles, market valuation levels, economic regimes ) the strategy produced alpha higher than the returns produced by the likes Templeton, Neff, and Buffet / Munger.
The advent and evolution of low expense funds / ETFs specializing in these risk factors makes it easy for the average investor to be "their own" legendary manager without reliance on an "expert's" esoteric asset selection methodology.

* DFA Emerging small cap, U.S. Small cap value, U.S. large cap value fund data used 1994 - 2016 and IFA emerging index, U.S. small cap value, and U.S. large cap data used 1954 - 1994.
** http://tinyurl.com/z9xddr5
*** https://docs.google.com/spreadsheets/d/1tvKoFaFCQhbO5gQSld7i8TMPw_ZTXB1-AA_9velX_tM/edit#gid=102066566

BenWP

I suspect the proliferation of ETFs, ETNs, and particularly the "enhanced" versions (3X bull, 3X bear, etc.) has made the star manager a relic. I for one wish the financial press would not list ETFs alongside MFs when highlighting the quarterly, yearly, and longer performance figures. If gold rose during the last quarter, of what utility is to the average investor to see some ETF on anabolic steroids at the top of the performance ranking for all funds? What use is it to show that bearish ETFs top the list of 10-year losers? These days, such lists do not reveal talented managers. Old-timers like me enjoy poring over MF statistics the way I studied MLB stats as a kid. Unfortunately, what appears in the NYT, WSJ, and Barron's these days is dreck contaminated by funds most investors ought never touch.