When a space shuttle is launched, it takes hundreds of people to make it happen. You’ve got one group focused on flight speed, another watching the electrical systems, a third monitoring the astronauts’ health–and those are just a few of the people on the ground. Throw in some physicists, and a chemist or two, and you’ve got yourself a full army of folks with their own opinions, expectations, and skills all working toward the same goal.
But does having so many people focusing on one outcome cause more chaos than calm? In some situations,yes. That’s why the majority of the mutual funds out there have only one or two fund managers running the show. They make the final investment decisions, they determine when and where the next check will be invested, and if they’re correct in their theories, the investor makes money.
Consider, however, having not one or two fund managers, but almost 40. Meet Exeter Pro-Blend Conservative Term/A (EXDAX), one of several funds Rochester, New York-based Manning and Napier Advisors, Inc. has to offer. As the most conservative of four Pro-Blend life cycle funds, EXDAX is run by a group of research groups. This approach, as strange as it may sound, works well, and has since the fund’s inception in 1995.
Standard & Poor’s awards the fund five stars, while Morningstar gives it four. For the five-year period ended July 31, 2003, the fund had an average annualized total return of 6.4%, versus a total return of -1.1% for the S&P 500, and a total return of 1.6% for all balanced large-cap funds. Pro-Blend Conservative ranked 9th within the entire universe of 461 funds in this peer group.
To better explain this unusual hierarchy of research and investing, we spoke with Jeffrey Coons, a member of the fund’s investment policy group and co-director of research at Manning and Napier.
You’re a member of the fund’s investment policy group, but who is responsible for what in managing the fund? We have a very team-based process on the investment side that is driven by specific investment strategies. Our analysts–27 stock pickers–and 12 economists drive the day-to-day decisions. The management team of senior people is responsible for maintaining this process, making sure that it is operating well, and monitoring risk in the portfolio to ensure that we are in line with what we are trying to do from an objective standpoint.
The process starts with our investment policy group, which comprises about a half a dozen people who are each responsible for different research areas inside the firm.
Part of that group represents global investment strategies. They are responsible for macro-economic forces, trends, interest rates, markets, and currencies on a global basis. Then you have the fixed-income research area that focuses on interest rate trends, trends in the U.S. economy, and the yield curve. Then you have the quantitative strategies group, which is my group. We are responsible for some of the statistical work that is done in screening companies and opportunities, looking at sectors, looking at the overall market and its attractiveness.
So my group is half of that investment policy group and we bring in the top-down influence to help analysts understand what the macro-economic forces are, what the trends are, and also to help them understand where they should be fishing. Basically we are a bottom-up shop, which means our analysts drive most of the investment decisions, but we can help them better understand where those micro-opportunities are given the macro-economic forces.
Who has the final say? That is done on a stock-by-stock basis by our analysts. Most funds will have a portfolio manager that will interpose their view of what is going on in the world onto the types of stocks that are coming into the portfolio. We [instead] give guidance to our analysts and then monitor for quality control to make sure that the stocks going into the portfolio fit with what we do and who we are. Ultimately those 27 analysts are the ones looking for equity opportunities.
So that really gives your analysts a lot of power in picking the portfolio? Our view is that at some level the portfolio managers get in between the people who really understand the investments in the portfolio, so by sticking to the analysts we will be closer to the investment opportunity and not have an extra filter in there. For quality control, every stock that is brought into the portfolio will have two analysts that responsible for it. We have the primary analyst who makes the recommendation and the reviewing analyst whose [input] will also be attached to that stock, either positive or negative.
We always want to have someone on hand who understands what is going on with each of our companies.
What are you specifically responsible for? I do quantitative analysis of the markets and the economy.
Our bottom-up groups are divided into sectors on a global basis. We have one group that focuses on consumer related stocks globally, another group that looks at capital goods and materials globally, a group that does technology, one does sciences, and then a fifth group does services, including financial stocks or transportation or utilities. By dividing the world up into sectors but having the sectors covered on a global basis, we now have analysts evaluating entire industries to find opportunities that fit our strategies.
You’ll notice our portfolio is a global one, with U.S. and foreign stocks, and small and large companies.
Do you ever have a problem with too many people working on one fund? Everyone has such specific responsibilities, an industry that they are covering, or they are responsible for some element of our macro-economic view. It is a very flat but disciplined process.
In general, how would you characterize this fund? As a core government bond fund? We consider this to be the most conservative of our four life cycle funds. The funds are conservative term; moderate, which is slightly more aggressive; extended term; and then maximum term. In each of these funds you’ll find the same basic equity portfolio but with different asset allocation ranges, depending on the risk/return tradeoff appropriate for that client. Each fund goes through the same equity process, and the same research team works on all of them. When we make a recommendation for a stock, we will have different position sizes depending on the risk level appropriate for that fund.
Does this fund’s performance correlate well with the general bond indexes? The conservative term fund has a significant allocation to U.S. Treasury bonds so there is a correlation there. But you also have to understand that we range from about 5% to 30% in stocks, and that ends up being another source of diversification that will make it less correlated to some of the bond funds. It is very much a conservative asset allocation fund.