How many managers does it take to manage a mutual fund?
For the 51 funds that use multiple managers today, the answer is simple. But what does this multi-manager approach actually do for investors? Does the use of multiple managers, with at least one manager outside of the fund family’s investment management group, actually produce better investment returns than funds which use a team of in-house advisers?
The answer depends on who you ask.
Multi-adviser funds have existed since October 1958 when Vanguard’s Windsor I Fund employed a team approach of in-house managers to handle investment responsibilities. The Windsor II Fund was started in June 24, 1985, with four in-house managers and was then combined with the Windsor I fund.
Multi-manager funds hire separate, outside fund companies to manage a specific fund. The fund company that hires outside managers claims they bring different resources, talents, experience and expertise to the fund adviser. When these different managers are combined together to manage a specific fund, the goal is that their combined expertise will be greater than the sum of the individual parts. That’s the theory.
In practice, multi-manager funds do pretty well in their respective peer group rankings over the one-, three-, five, and 10-year periods, according to Morningstar. Based on an analysis of performance data (through Nov. 16, 2010), of the 25 largest multi-manager funds, 10 of these funds ranked in the top third of their respective fund categories for the one-, three-, five- and ten-year time periods:
But this does not make a definitive case that more manager talent will consistently catapult a fund into the top quartile on a consistent basis. One of the biggest criticisms of multi-manager funds is that while they claim to be able to identify the “best” managers in their respective categories, the actual results are very different. For example, one investment officer of a top multi-manager fund company, summarized what many others who hire multiple managers would say, when he emphasized that “our insight (is) in distinguishing managers who, we believe, have a better-than-average chance of outperforming (which) can be used to the investor’s advantage.”
However, people who have criticized multi-manager funds contend that it is too difficult to consistently identify and monitor manager performance to insure shareholders that they have hired the best and brightest managers. Many have noted that multi-manager funds are too slow to fire underperforming managers, while others have said that too many managers in a single fund (one multi-manager fund has 11 managers for its core equity fund alone) promotes closet indexing. Then there is the issue of expenses.
Origins of the Multi-Manager Approach
Mutual funds have evolved as the investment industry has become more complex, larger, and global. Funds managed by an individual manager are rare and while there are few industry statistics to verify this, it’s more common now to have a team approach to fund management.
But the idea of using multiple managers to provide day-to-day investing expertise for a single fund was prompted more by regulation than the pursuit of alpha. The landmark Employee Retirement Income Security Act (ERISA) of 1974, considered the most complex piece of legislation since the New Deal, created new responsibilities for pension plan sponsors, including the mandate that they hire qualified, professional investment managers to obtain the best risk-adjusted return for their pension plan. (ERISA pre-dates the 401(k) revolution.)
But how does a pension plan sponsor find the best qualified investment manager? This was the great question that reinvigorated the institutional investment consulting world in their expensive and unending quests to find the most deserving managers in the land. Every manager was a Cinderella waiting to be discovered.
By the late-1970s, it became apparent that while the continuous manager searches were profitable, it was a difficult task as each quarter produced hard data showing there was a near-continuous rotation among the “best” managers. This was more of a regulatory burden than a performance burden. This problem led to the idea of hiring a team of external managers selected from the screened manager universe. The Frank Russell Co. takes credit for developing the multi-manager concept for mutual funds in the late-1970s. While this may have been prompted more by the pension fund board’s need to meet their fiduciary duties with ERISA, more than the pursuit of exceptional fund performance, the idea gained traction.
Yet, while this was a novel idea, it was not universally accepted among some respected investment managers of the time. In a 1983 article, Dean LeBaron of Batterymarch Financial Management, wrote:
“Agents often behave in ways that may be uneconomic to beneficiaries. Take for example, the growing use by pension sponsors of multiple managers, with its corollary of having sharply rising costs. There is little evidence that aggregate results improve enough to justify the expense. This phenomena may be best explained in terms of the sponsor’s desired to minimize short-term career risk from volatility by diversifying across many managers.”
Today, the multi-manager “phenomena” continues, but it remain unclear whether the net investment results justify the expense for this entire category of funds. Here is a list of the top performing multi-manager funds by time frame, sector and performance.
Top-Rated Multi-Manager Funds by Time Frame, Sector, Performance
Top Performing Multi-Manager Fund, 1-Year
John Hancock Funds High Income (JHAQX)
- Fund Advisers: John Hancock Investment Management; MFC Global Investment Management
- Load: None
- Expenses: 0.71%
- Sector: U.S. High Yield Bond
- 1-Year Return: 34.44%
- Top Holdings: Xm Satellite Radio, Harrah’s Operating Co. (first lien), Ual Cv, Greektown Superholdings, Cii Carbon LLC.
(Returns through Nov. 16, 2010)
Source: Morningstar
Top Performing Multi-Manager Fund, 3-Year
John Hancock Funds High Income NAV (JHAQX)
- Fund Advisers: John Hancock Investment Management; MFC Global Investment Management
- Load: None
- Expenses: 0.71%
- Sector: U.S. High Yield Bond
- 3-Year Return: 7.10%
- Top Holdings: Xm Satellite Radio, Harrah’s Operating Co. (first lien), Ual Cv, Greektown Superholdings, Cii Carbon LLC.
(Returns through Nov. 16, 2010)
Source: Morningstar
Top Performing Multi-Manager Fund, 5-Year
Vanguard Energy Inv (VGENX)
- Fund Advisers: Vanguard Group, Wellington Management Co.
- Load: None
- Expenses: 0.38%
- Sector: U.S. Equity Energy
- 5-Year Return: 7.00%
- Top Holdings: Exxon Mobil, Occidental, Chevron, Halliburton, BP Plc ADR.
(Returns through Nov. 16, 2010)
Source: Morningstar
Top Performing Multi-Manager Fund, 10-Year
Vanguard Energy Inv (VGENX)
- Fund Advisers: Vanguard Group, Inc.; Wellington Management Company
- Load: None
- Expenses: 0.38%
- Sector: U.S. Equity Energy
- 10-Year Return: 13.00%
- Top Holdings: Exxon Mobil, Occidental, Chevron, Halliburton, BP Plc ADR
(Returns through Nov. 16, 2010)
Source: Morningstar
