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After more than a decade of hiring and firing equity managers based on how they fit into tightly categorized style boxes, three years of poor markets have convinced some in the institutional world that money managers need a freer rein to maximize returns.
This emerging leniency has set the money management industry abuzz, especially the growth-stock camp. Portfolio managers and intellectuals as diverse as James Stowers III and Peter L. Bernstein support a return to broader mandates that let managers be truly active stock pickers with little regard for benchmarks and tracking error, like Mr. Lynch, Fidelity Investments' most famous cowboy-style investor.
"We've been style-boxed to death. I think a lot of good portfolio managers have suffered in their prime when they could have been developing better performance, but were told not to cross the line or leave the playground," said Mr. Stowers. He is co-chairman, chief investment officer, U.S. growth equities, and portfolio manager of American Century Cos. Inc., Kansas City, Mo.
"But I'm starting to see a shift ... Now the consultants are starting to say that a good section of their client base is starting to show interest in more free-range activities," Mr. Stowers said.
Mr. Bernstein, who is president of an eponymous New York economic consulting company, told the May annual meeting of the Association for Investment Management and Research: "The principle is simple: Managers with skill should be free of constraints. Anybody in this business with skill must have a nose for value in more than one corner of the market."
Not quite there yet
Although free-range growth stock managers couldn't be happier, both managers and consultants say the trend toward loosening investment parameters is still nascent.
Essex Investment Co. LLC, Boston, has managed a $68 million mutual fund and $1.8 billion in institutional separate accounts in an all-cap growth strategy since 1976. Craig Lewis, principal and portfolio manager, expects the strategy will attract a lot of assets from institutional investors looking for very active managers.
So far, hires have been relatively few. "I have been reading a lot about this lately, but haven't seen it happen. Consultants are still slicing and dicing by the style boxes. I'm still not sure if that is client-driven activity," Mr. Lewis said.
Frank Russell Co., Tacoma, Wash., has embraced, to some degree, the notion of go-anywhere mandates. Russell uses Strong Capital Management Inc., Menomonee Falls, Wis., to manage about $1 billion in domestic all-cap growth stock portfolios within its manager-of-managers funds and separate accounts, said Steve Claiborne, a Russell spokesman.
Kevin Gaughan, a Strong portfolio manager and equity strategist, said consultants and plan sponsors now are telling him that they recognize a portfolio manager "can't be in a specialist style box. What will work in the new millennium is truly active management."
"Plan sponsors say they need managers with flexibility and creativity, but they haven't gotten around to doing much hiring yet. The wind is blowing that way," said Willie Zantsinger, partner at equity manager Gardner Lewis Asset Management LP, Chadds Ford, Pa. Gardner Lewis' investment style is very fundamental without concern for whether a stock qualifies as large-cap or small-cap, growth or value, Mr. Zantsinger said.
The move to more free-ranging strategies "won't happen overnight, because the entire plan sponsor and consulting communities have grown up on compartmentalization and a style structure that says we need to put our managers into some kind of rigid structure to ensure diversification. That's important, but you can still give managers some latitude," Mr. Zantsinger said.
Monte Tarbox, vice president and director of consulting practices at Independent Fiduciary Services, Washington, agreed. "Consultants are quick to pigeonhole managers, but we'd be a lot better off if we worked harder to develop the ability to discern alpha and how managers generate it. We want to know how much of a manager's return is due to style vs. skill so we can match them to other managers within the portfolio to achieve diversification. Frankly, we haven't done a good enough job at that," Mr. Tarbox said.
But while he is open to the idea of wider latitude, he is "not eager to permit managers to go anywhere. We are eager to see where their sources of alpha are coming from."
Michael Rosen, principal of Angeles Investment Advisors, Santa Monica, Calif., has been recommending managers like Ken Abrams at Wellington Management Co. LLP, Boston, or Michael Fasciano of Neuberger Berman Inc., New York, who are "just really good stock pickers."
"Consultants need to identify more managers with demonstrated investment processes that are more flexible with regard to style and capitalization. A lot of the core strategies and flexible managers are capacity constrained. It's a problem for the big consulting firms because they can't recommend them because their client base is too big. They can't recommend a manager like that to me and not to other clients."
Another reason for consultant queasiness about go-anywhere strategies is the sheer difficulty of fitting them into standard asset allocation models.
"How do you go beyond the analysis, the dissection, the quantitative measures to get to the qualitative issues? A lot of very good managers don't get considered because consultants can't get their arms around them. Sometimes, you just know ... a firm or a portfolio manager has the ability to see the market and opportunities in a certain way," said Greg Weaver, president of consultant Marquette Alliance Inc., Tulsa, Okla.