Aug. 12, 2004 — In the early 1960s, the Chicago Cubs baseball club instituted a “college of coaches,” instead of having just one manager. It was done in order to turn that franchise around, but was a disaster, resulting in more last place finishes for the woebegone team.
In mutual fund investing, however, the multi-manager approach can be quite successful. Consider American AAdvantage Large Cap Value Fund/AMR (AAGAX), which is co-managed by a team of four subadvisors working independently of each other.
For the year ended July 30, the $730-million fund gained 22.1%, beating both its benchmark, the S&P BARRA 500 Value Index, which rose 10.2%, and the average large-cap value fund, which rose 17.3%. Over the longer-term, the fund has handily beaten its bogies. For the three-year period, the fund rose 5.2% annualized, versus an average 0.4% return for the peer group, and a 0.6% drop in the index. For the five-year period, the fund climbed 4.1%, compared to a gain of 1.5% for its peers, and 0.4% for the Index.
Launched in July 1987 as one of American AAdvantage’s four flagship funds, the Large-Cap Value fund is currently managed by Hotchkis and Wiley Capital Management LLC; Barrow, Hanley, Mewhinney & Strauss Inc.; Brandywine Asset Management LLC; and Metropolitan West Capital Management LLC, all of whom are value specialists. AMR Investments, a wholly owned subsidiary of AMR Corp. (AMR), the parent company of American Airlines Inc., oversees the four subadvisors.
The four money managers operate with autonomy and independently of each other. However, they must abide by some basic principles of value investing established by AMR Investments. In addition, they are evaluated quarterly to assure that they adhere to the fund’s investment guidelines, and their performance is also monitored.
“The subadvisors are required to invest in stocks with a minimum market-cap of $1 billion, in the range of the Russell 1000 Index, and with P/E ratios below the market and forward growth rates above the market,” said William F. Quinn, President of both AMR Investments and the American AAdvantage Funds. “Moreover, they cannot have more than a 30% exposure — or the index weight, whichever is larger — to any one sector; or more than 5% in any individual holding.” Once those criteria are satisfied, the managers have wide latitude in stock selection.
Hotchkis and Barrow have been with the fund since its inception. Brandywine joined eight years ago, and Metropolitan came aboard almost four years ago. In searching for managers, AMR looks for good long-term performance, and a historically consistent style. “Typically, before we give a subadvisor one of our mutual fund products to run, they have experience with managing some of our pension finds,” Quinn said. “Barrow, for example, has been managing money for American Airlines’ pension funds since 1980.”
As of June 30, 2004, the fund’s top ten holdings were Bank of America (BAC), 2.6%; ConocoPhillips (COP), 2.3%; Tyco International (TYC), 2.2%; Altria Group (MO), 2.1%; Boeing Co. (BA), 1.9%; Citigroup Inc. (C), 1.8%; Cendant Corp. (CD), 1.8%; MetLife Inc. (MET), 1.8%; Allstate Corp. (ALL), 1.7%; and J.P. Morgan Chase & Co. (JPM), 1.5%.
Quinn estimates that among the 162 stocks in the fund as of June 30, only about 30 to 40 overlap, but not in all four portfolios. “It is rare for a stock to be owned by all four subadvisors at any one given time,” he said. “Thus, we can always provide diversification.”