Managers with long tenure may perform better

Your Funds

Dollars & Sense

May 27, 2001|By CHARLES JAFFE

IN SELECTING a mutual fund, investors have been known to look at almost everything, from past performance and star ratings to cost structure, tax-efficiency to turnover, quality of the parent company to background of the manager.

That last category, the one where investors gauge the manager, may be the most subjective. Judging a manager may come down to an impression gleaned from a television interview or a snippet from a magazine article or a fund's promotional brochure.

But a recent study completed by Morningstar.com suggests that there may be one additional criterion for judging a manager, namely, length of service at the fund. The study shows that managers who have been on the job longer tend to have funds that do better than the relative newbies.

Looking both at 2000 and the 12 months ended March 31, 2001, Morningstar found that managers with an above-average tenure did better than newcomers. But the average tenure for a manager of a stock fund these days is 3.6 years, so "above-average tenure" doesn't actually say much.

That being the case, Morningstar also examined tenures that were far above average. It found that managers with 10 or 20 years' experience running a fund drastically outperformed the average, and crushed the new guy.

The average manager with 20 or more years of experience running a fund was up 4.54 percent in 2000, slightly better than the 4.07 percent gained by managers with 10-plus years at the helm, but worlds better than the 0.63 percent gain of managers with a mere above-average tenure of 3.6 years.

Managers with below-average tenures lost 1.36 percent in 2000.

"I'm not sure how many investors even look at manager tenure as a factor," says Dan Culloton, who directed the study for Morningstar.com.

"I'd consider someone with seven or eight years in a management job to be pretty well tenured. But if I was looking at a fund and the person there hasn't been running a fund - or running this particular fund - for five to seven years, I'd wonder what exactly they have been doing."

The Morningstar study, while interesting and worthy of consideration by investors, has its faults. For starters, there is the time period covered.

Not only is a year-plus too short to draw big conclusions, but it was a time that hit new funds (and, hence, new managers) hard. Among Internet and tech sector funds, for example, the majority of offerings have not been in existence long enough for the manager to have an above-average tenure.

Furthermore, the period saw a rebound in value investing, a style that seems to have attracted a lot of conservative graybeards.

Had the study period been 1999, when the tech sector was hot, the numbers might have been drastically different.

Next, tenure numbers can be misleading. Bill Miller, the long-time winner running Baltimore's Legg Mason Value, for example, took over management of Legg Mason Opportunity about a year ago. Miller certainly qualifies as a well-tenured manager in just about everyone's book, yet Morningstar grades him out as a newcomer for the Opportunity fund, a status that isn't really true.

"Experienced managers tend to be more conservative," says Culloton.

"The more time most managers spend in the market, the more disciplined and deliberate they become about their job," he said.

Still, manager tenure is far less of an indicator than investment style.

For proof, look no further than Kenneth Heebner of CGM Capital Development and Nvest Growth, or Gary Pilgrim of PBHG Growth. Both managers use aggressive, fast-moving strategies that heighten volatility.

They stuck to their discipline during the study period, but it didn't pay off, as both managers underperformed about 90 percent of their peers.

What's more, finding out about your manager's background isn't always as easy as it seems. A prospectus usually contains a few words, but for a detailed description of the manager's background, you need to look at a fund's "Statement of Additional Information," otherwise known as Part II of the prospectus. And funds don't send that document out unless asked.

Says Culloton: "Manager tenure shouldn't be the biggest factor in picking funds, but if you are picking between two funds, and one manager has a much longer tenure, tenure might be a good tiebreaker."

Chuck Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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