Team-managed mutual funds are on the rise as mutual fund companies look for strength in numbers and try to avoid falling victim to "stars" who leave.
Indeed, team-managed funds increased nearly 50% in the last three years. The percentage of team-managed funds has grown to 39.4% of active domestic equity funds, up from 21% in 1997, according to Thomson Wiesenberger Financial, a mutual fund tracking firm in Rockville, Md.
It's not a coincidence that the increase in team-managed funds coincides with the bullishness of the stock market, said Ramy Shaalan, mutual funds analyst at Wiesenberger. Strong performance can lead to turnover among star managers like Aaron Harris, who recently left Nicholas-Applegate Capital Management, San Diego, to manage a fund at Villanova Capital Management Inc., Conshohocken, Pa., or Tim Keefe, who left Hancock Funds, Boston, to start a hedge fund.
Bob DiMeo, managing director at DiMeo Schneider and Associates, said the trend toward team-managed funds is one he's noticed in the defined contribution market in the past few years. A major reason is portfolio manager turnover as plan sponsors have grown more cautious of going through the process of hiring an individually managed fund and have that manager leave.
He said the average plan sponsor is more aware of portfolio manager changes than in years past and many have developed a preference for the team approach. "They take some comfort in there being more than one person at the helm," said Mr. DiMeo.
"The bigger firms probably have more infrastructure to facilitate the star system," citing Fidelity Investments, which he said has "a pretty good track record of replacing good managers with good managers."
One concern of the star system, added Mr. DiMeo, is when the "star" is stretched too far. When an individual manager is running other funds, making appearances, or in cases of smaller start-up firms, trying to grow a business, it can be a negative.
Tennis vs. football
Because the reliance on one person is much greater on a star than it would be a team, Mr. DiMeo added, it becomes a tennis match, with one player, and not a football game with many players.
There are different approaches to the team-management philosophy. Some firms have teams headed up by leaders. Others, like State Street Research & Management Co., Boston, take a broader approach. State Street Research uses a team approach that features the contributions of its analysts.
The Galileo Fund, for example, has 16 managers. It is a sector-neutral fund covered by 16 analysts who are essentially portfolio managers. Maureen Depp, portfolio manager of the Galileo Fund, is an analyst covering consumer stocks. She does not pick stocks for the fund other than those in the sector she covers, but she does monitor the sector weightings and oversee the more routine duties of a portfolio manager.
Ms. Depp said the approach creates a "tremendous flow of investment thoughts and ideas across industry categories." And because analysts are measured by their performance in the sectors they cover, they must take responsibility for their investment choices, an issue that has plagued the team approach because investors would wonder who is managing the fund.
A `competitive advantage'
Putnam Investments Inc., Boston, long has used the team-managed approach. They address the accountability issue by naming a portfolio manager -- essentially a team leader.
In recent years, said Stephen Oristaglio, senior managing director, deputy head of investments, his firm's team-managed approach has become a competitive advantage.
An overriding reason is performance, which has been strong at Putnam. In addition, said Mr. Oristaglio, as investing becomes more complicated with so many new opportunities arising from new industries, markets and companies, team-managed funds make more sense.
"The information you need to get out of the marketplace is overwhelming. One person being totally accountable for that, even if he or she is drawing upon company resources, is a much more difficult challenge today," he said.
At Fidelity, Boston, a vast majority of the firm's assets are managed by single managers. Still, Fidelity uses the team approach for funds that have wide mandates, such as balanced and international funds, said Richard Spillane, senior vice president, Fidelity Management & Research Co.
When it makes sense
"We're not religious about it one way or the other," said Mr. Spillane. "Where we think it makes sense to use a team approach, we will. Where we think it makes sense to use an individual manager approach, we will."
Mr. Spillane said Fidelity typically uses single managers where there is a single mandate, such as U.S. growth or U.S. value equities. He finds that in those cases, the single manager approach leads to "crisper" information processing and decision-making.
He noted one downside to the team-management approach is "you can hide a lot sins" in it. While he said Fidelity notifies clients of team changes, he said other firms often change managers and shift styles without making it known.
"Certainly fund manager changes are a communications challenge," said Mr. Spillane. "We'd rather deal with the communications challenge and be upfront and explicit about what's going on," whether it's within the underlying team, or an individual fund.
One such challenge was replacing star manager Beth Terrana, who managed the Fidelity Fund, Advisor Growth & Income Fund and Destiny II Fund. She left that position in June to take a management position in the company.
"People forget where Beth came from. She came from the Fidelity research department," said Mr. Spillane, noting that department also spawned investment legends like Peter Lynch, Bruce Johnstone and Bob Stansky.