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Your Mutual Fund Manager Just Doesn’t Matter Much Anymore
FYI: Sometime back in the 1990s my financial adviser and I were discussing an investment in the Fidelity Contrafund, a high-performing mutual fund helmed then — and still — by the legendary Will Danoff.
I can’t recall exactly, but I expressed some misgivings about the fund’s fees.
Right. I'm entirely on board with the claim that the average manager is just a cog in a team-managed, marketing-sensitive team whose mantra is "don't get noticed!" The question is, what useful insight does that convey? One line of argument is "avoid all actively managed funds." The other line of argument is "avoid, at the very least, all funds which merely pretend to be actively managed but whose record shows no continued distinction on the returns side of the ledger or on the risk side."
"Management change in a fund has no bearing on future returns."
Nonsense, and the M* report said no such thing. While funds, on average, may perform the same after changes as before, that says nothing about individual funds. If half the replacements were by managers who improved their fund's performance, and half the replacements were by managers who degraded their funds, the average would be a wash.
What the M* study said was that they couldn't figure out a priori which changes were the better ones, not that the a change in an individual fund had no bearing on the fund's future returns.
I'll take Rekenthaler's summary of the report over WaPo's. If you want to skip the anecdote and get to his analysis, skip down to the Mixed Signals section.
Vinik took over from Morris Smith (FMAGX). If you're talking about taking over Fidelity "flagship fund" status, as I recall Contra's AUM passed Magellan during Stansky's tenure.
Stansky is a prime example of what the report is talking about. Vink's performance had disappointed investors (Vinik was early, not wrong, but that didn't seem to matter), so Stansky was moved in. Stansky had manged FDGRX very well for its first decade before moving over to Magellan. But he tempered his style at Magellan, which was marketed to retirement/pension plans, and gradually became an underperforming closet indexer.
Single, good manager moved from one LCG fund to another, and did poorly. Hard to predict even with single-manager-run funds and managers with long track records.
There is no universal correct answer to the fund management question. It depends on the specifics. Most funds these days are team managed, like 75% of them. For this majority, the answer is in the No bracket. But a respectable number of funds are managed by a mostly single or small group cohort that has a decisive influence on market decisions. It matters in this active group of fund managers.
The primary example here is the Warren Buffett/Charley Munger team. Any change here will likely have a major impact on how their firm will survive amd function. Even with this illustrious team, yearly performance varies over a wide range. Skill matters when investing, but luck and opportunities are unpredictable and also enter the performance equation. In the marketplace, the only certainty is outcome uncertainty.
Certainly not all fund managers are equal. Do you remember the Steadman fund family? I do. Those funds had dismal performance records for many years. Just like there are some long term losers, there are some long term winners. The trick is to identify them early. That's not an easy job.
Good luck for a successful search. A significant number of exceptions always exist.
Best Wishes
ADDED THOUGHT: Statistics are helpful, but can be misleading when incompletely reported. It is not enough to simply report the average of a Normal distribution. That's nice, but not enough. The standard deviation, the maximum and minimum values, and the sample size are needed to permit a meaningful interpretation of that statistic. Buyer beware!
Comments
David
Nonsense, and the M* report said no such thing. While funds, on average, may perform the same after changes as before, that says nothing about individual funds. If half the replacements were by managers who improved their fund's performance, and half the replacements were by managers who degraded their funds, the average would be a wash.
What the M* study said was that they couldn't figure out a priori which changes were the better ones, not that the a change in an individual fund had no bearing on the fund's future returns.
I'll take Rekenthaler's summary of the report over WaPo's. If you want to skip the anecdote and get to his analysis, skip down to the Mixed Signals section.
Rekenthaler Report, What to Do If Your Fund Changes Portfolio Managers
M* report, The Aftermath of Fund Management Change
Stansky is a prime example of what the report is talking about. Vink's performance had disappointed investors (Vinik was early, not wrong, but that didn't seem to matter), so Stansky was moved in. Stansky had manged FDGRX very well for its first decade before moving over to Magellan. But he tempered his style at Magellan, which was marketed to retirement/pension plans, and gradually became an underperforming closet indexer.
https://www.advisorperspectives.com/pdfs/newsltr08-2-4-3.pdf
Single, good manager moved from one LCG fund to another, and did poorly. Hard to predict even with single-manager-run funds and managers with long track records.
There is no universal correct answer to the fund management question. It depends on the specifics. Most funds these days are team managed, like 75% of them. For this majority, the answer is in the No bracket. But a respectable number of funds are managed by a mostly single or small group cohort that has a decisive influence on market decisions. It matters in this active group of fund managers.
The primary example here is the Warren Buffett/Charley Munger team. Any change here will likely have a major impact on how their firm will survive amd function. Even with this illustrious team, yearly performance varies over a wide range. Skill matters when investing, but luck and opportunities are unpredictable and also enter the performance equation. In the marketplace, the only certainty is outcome uncertainty.
Certainly not all fund managers are equal. Do you remember the Steadman fund family? I do. Those funds had dismal performance records for many years. Just like there are some long term losers, there are some long term winners. The trick is to identify them early. That's not an easy job.
Good luck for a successful search. A significant number of exceptions always exist.
Best Wishes
ADDED THOUGHT: Statistics are helpful, but can be misleading when incompletely reported. It is not enough to simply report the average of a Normal distribution. That's nice, but not enough. The standard deviation, the maximum and minimum values, and the sample size are needed to permit a meaningful interpretation of that statistic. Buyer beware!