Jan. 29, 2003 -- Nothing lasts for ever, including a mutual
fund manager's tenure. Few events, in fact, are more challenging for
investors and their advisors than sorting through the morass that follows
one manager's departure and the advent of his or her successor.
"This is a major issue, and one that investors shouldn't underestimate,"
says Jeff Molitor, director of portfolio review for the Vanguard Group. "Any
time you introduce change, you introduce uncertainty."
The risks to both a mutual fund family and investors are manifold.
Investors fear that a new manager might take the fund in a different, less
rewarding direction, while fund families fear anxious investors will bolt to
It's true that a new manager can bring a new style to the fund,
consciously or unconsciously. These changes rarely can be anticipated by
advisors when they steer their clients in the direction of a particular
fund, but can turn out to have a significant impact on returns.
Standard & Poor's takes into account the quality and consistency of a
fund's portfolio managers in its analyses, including the structure of the
team and the investment discipline, to identify funds likely to provide
consistent, above-average performance over time. Qualitative data on
portfolio managers and the firms that run the funds is important to help
ensure that managers are implementing and maintaining a clearly defined
When Jeffrey Vinik succeeded Peter Lynch at the helm of the Fidelity
Magellan (FMAGX) in 1990, he took Fidelity's benchmark product in an
entirely new and unanticipated direction, shunning Lynch's favored growth
stocks for large-cap value stocks, and boosting Magellan's holding of bonds.
At first, the consequences of this strategy weren't entirely appreciated by
investment advisors, who suggested their clients stay put since, despite the
different approach, Vinik was turning in solid performance numbers. But by
late 1995, the new strategy had begun to take a toll on returns as well, and
Magellan investors sat on the sidelines watching as technology stocks
started to rally. Investors rebelled, furious that that Vinik had loaded up
a stock fund with bonds, and the manager resigned only months later.
Fund families keep the lessons of what is known as "the Vinik phenomenon"
in the front of their minds today. Molitor says that kind of risk is why
Vanguard, for its part "shies away from the rock-star (money) manager."
Instead, he adds, "we offer an organization with a disciplined process that
will deliver consistent results to investors over time."
Whenever possible, Vanguard attempts to create an orderly succession
process to ensure that consistency. On Dec. 31, 2002, Ernst von Metzsch
retired as a partner with Wellington Management Co. and as portfolio manager
of the Vanguard Wellington Fund (VWELX). Knowing that von Metzsch's
departure was looming, Wellington and Vanguard took more than a year to
select and train his successor, 44-year-old Ed Bousa.
"We've been together now for nearly two years, with offices right next to
each other and we talk all the time about what we're doing with the
portfolio," von Metzsch said shortly before his departure. "The transition
will basically be pretty seamless: one day I won't show up and Edward will
make all those transactions."
Mutual fund firms and investment advisors also agree the best handovers
are those where the outgoing and incoming fund managers overlap for a period
of time, with the newcomer serving what amounts to an apprenticeship. That's
what happened at T. Rowe Price, where Mike Sola last year succeeded Chip
Morris as manager in charge of the T Rowe Price Science & Technology Fund (PRSCX),
after five years working with him and two years running a smaller fund, the
T Rowe Price Developing Technologies Fund (PRDTX).
Still Sola hasn't blindly followed Morris's lead. He's tweaked the
portfolio, cutting holdings in stocks he believes are too risky (like Ariba)
and boosted holdings in software stocks like Siebel (SEBL) and
PeopleSoft(PSFT). He's also increased the size of the portfolio, from 50
companies to 75, in order to reduce the portfolio's risk level.
While consistency is good, investment advisors shouldn't look for a
carbon copy money manager, cautions Kevin Gaughan, portfolio manager and
equity strategist at Strong Funds. Changes like Sola's are only natural.
"What's important is staying true to the philosophy and the process of
the fund," he says. "People can get too rigid -- new managers have to have
Some of the characteristics Gaughan looks for in a promising new manager
are relatively simple for an advisor or his client to determine: does that
manager have a track record managing a similar fund? Has he or she been
involved in the new fund's team already? Do they have incentives for turning
in a good performance? Do they have a long-term track record at the funds
they have run in the past that shows that they're not flighty? Other
qualities are less easy to nail down: does the manager have what Gaughan
calls "passion" for what he does?
It's not always possible for fund families to plan the kind of smooth
succession that happened at Vanguard Wellington. For instance, a group of
five managers and analysts defected from Northern Trust to rival Neuberger
Berman just before Christmas, as previously reported by Fund Advisor.
"The disruption is real, and it's not something you can gloss over
because we were having good results with these people as part of our team,"
says Lloyd Wennlund, managing director of mutual funds at Northern Trust.
Nonetheless, he named replacements within hours. "The day of the departures,
the new people were in place, and trading for the accounts."
This highlights another question investors and their advisors should ask
of funds in which they are invested: how large is the team working on the
fund? If the top manager decides one morning to switch firms, how many
people are well qualified to step into his shoes?
Wennlund said Northern's goal is to ensure there is always a sizable
group of people who can be tapped to take on these leadership positions.
Prospective managers only have to ask to get details of the size of the team
working on any fund, and their experience.
"Our firm is like an iceberg: what people see is the manager who is named
on the prospectus, but in our case, a lot of the depth of experience is
under the water and less visible," Wennlund says.