When it comes to mutual fund managers and their track records, the adage is true: You can’t take it with you.
It’s a problem that could complicate the search for that next great mutual fund.
Much has been said this year about the hot demand for investment talent, creating a virtual free-agent market like professional baseball. Fund managers who beat market benchmarks, if only once in a while, are jumping to different firms or setting up their own organizations while they have a hot hand, often leaving investors with the nagging question, do you know where your fund manager is tonight?
But as managers switch teams, their new organization almost always is barred from advertising their lifetime batting averages.
This rule is based on sound reasoning. Almost no mutual fund manager is solely responsible for the results of a fund. The skills of the investment company’s trading desk, analysts and support staff as well as the general culture of the fund organization contribute to investment results.
A manager who chases an opportunity to switch to a different fund organization or start a new, independent fund may not be able to replicate the previous investment system, let alone previous results.
The Chicago-based William Blair Value Discovery Fund, which premiered a year ago, is managed by three stock pickers who were three-fourths of a team that managed the Post-Venture Portfolio, an institutional fund at Chicago-based Brinson Partners.
Co-manager Glen Kleczka, who spent more than seven years with the Brinson fund, said there was no way Blair would publish the results he and co-managers David Mitchell and Cappy Price helped achieve at Brinson. With the fourth manager on the team, Alvin Marley, remaining with Brinson, the Post-Venture Portfolio track record stayed with Brinson (where it can be found on the Pensions and Investments Web site, (www.pionline.com).
“It would be nice information for the public to have . . . (but) unless the entire team that managed the fund is involved in the management of the new fund, the record is not transferable,” said Kleczka. (The Blair Value Discovery Fund was up 31.8 percent through mid-December, compared with 18.2 percent for the benchmark Russell 2000 index of small-company stocks–a commendable record Blair is free to promote.)
The Association of Investment Management and Research (AIMR), the Charlottesville, Va.-based trade group for investment managers, has long advocated the proposition that “investment performance is owned by the firm,” said chief counsel Michael Caccese. AIMR recommendations for investment performance presentation are considered the standard in the business.
The portability rule, which reflects regulations of the Securities and Exchange Commission and the National Association of Securities Dealers, is intended to prevent misleading advertising by fund companies. But it has certain effects contrary to the interests of mutual fund investors.
The inability of a fund manager to carry a track record out the door serves as a barrier to the manager leaving a firm where relationships may have soured to the point of hurting performance. Unless the manager has achieved considerable individual acclaim in the financial press, his or her marketing value to a potential new employer is limited for several years.
Attracting investor cash into a startup fund with no promotable track record is difficult and costly. Morningstar, the Chicago-based mutual fund research firm used by many individuals and investment advisers to select funds, won’t calculate its well-known star ratings on a fund until it has at least three years under its belt, even though the managers have many more years under theirs.
While regulators and the investment profession are right to prohibit apples-and-oranges comparisons of investment track records, the policy may stifle the professional growth of the best and brightest fund managers.
Just as your retirement fund is becoming more portable as you change employers, the portability of your fund manager’s track record may be liberalized. In August, the SEC permitted Elizabeth Bramwell to advertise her previous record at the Gabelli Growth Fund in starting the independent Bramwell Growth Fund. The SEC found that Bramwell’s expertise was the dominant ingredient in the performance of Gabelli Growth Fund and therefore was transferable.
The regulation arm of the National Association of Securities Dealers recently surveyed NASD members on the subject and obtained many “constructive” suggestions, though NASD officials won’t reveal them at this time.
Caccese at AIMR foresees the day when successful managers will negotiate portability terms with potential employers to keep their track records alive.
Meanwhile, academics continue to investigate the usefulness of investment track records in predicting future fund performance. The answer to that question may decide the track-record portability issue.
Dumb question: What’s a good mutual fund to give as a gift to children?
Any fund appropriate for long-term investors should be good for children. The Mutual Fund Education Alliance, an information service sponsored by the mutual fund industry (www.mfea.com), recommends four funds “specifically designed for investments for children:” Twentieth Century Giftrust Fund, Royce Giftshares Fund, Stein Roe Young Investors Fund, USAA First Start Growth Fund.
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The weekly “dumb question” from readers is answered each Sunday in the belief that there is no such thing as a dumb question when it comes to understanding the financial markets. My address is 435 N. Michigan Ave., Chicago, Ill. 60611. My phone number is 312-222-3599. My e-mail address is WEBarnhart@aol.com.
