Michael Price’s recent announcement that he will stop managing the Mutual Series funds in October has his fans and the industry wondering who is “the next Michael Price,” the next superstar or legend in the making.
Here’s a tip: Don’t go looking. You may want to believe that there will be a second coming of Price or former Fidelity Magellan star Peter Lynch or Vanguard Windsor’s John Neff, but the truth is that the industry really doesn’t make managers like that anymore.
The days of the legend or guru could well be over.
For starters, the legends made their names in a much different market. Lynch packed it in nearly a decade ago, Neff a few years back. Phil Carret, who practically pioneered the entire fund business, and Sir John Templeton, who led the way in international investing, haven’t directly managed funds for years. Bill Ruane and Richard Cunniff of Sequoia Fund–regarded by most observers as the perfect model of a successful fund–are about to call it quits.
Price leaves at a time when his reputation may be tarnished. His funds have lagged the market and peers for some time now.
Never mind that the average annualized return on his Mutual Shares fund has outpaced the average growth-and-income fund by two percentage points per year since 1983; a bad stretch of results is enough to do in a career in the minds of many observers. Given Price’s penchant for investing in bankrupt companies–of which few quality opportunities exist in the current bull market–it’s not particularly surprising that he’s off the pace now.
That his star could be dimmed by recent numbers highlights the futility of seeking legends-in-the-making. People are not long-term oriented enough to stick with would-be stars.
The industry and investment climate that created Lynch is so different today that it can’t create such a megastar.
Some of the stars of the early 1990s rocketed to the top on the strength of superior performance but have been unable to sustain it. The list includes Gary Pilgrim of PBHG Funds, Robert Sanborn of Oakmark Fund, Ralph Wanger with the Acorn Funds, Jim Crabbe of Crabbe-Huson Funds, Don Yacktman of the Yacktman Funds.
Despite impressive long-term records, recent numbers have brought their genius into question, at least in some circles.
That may be more fickle than fair. In 1990, for example, Vanguard Windsor lost 15.5 percent, or five times more than the Standard & Poor’s 500 index; had that been Neff’s third year on the job, instead of his 26th, he might not have survived to have beaten the S&P by an average of three points per year over his 31-year career.
Today’s rising stars also lack the freedom and manageable asset sizes of their forebears. Over Lynch’s last decade at Magellan, the fund returned a remarkable average of 28 percent per year, compared with 17.5 percent for the Standard & Poor’s 500. But Lynch–like Price, Neff, Templeton, etc.–could invest wherever he wanted.
That same freedom may have cost Jeff Vinik, one of Lynch’s successors, his reputation. Vinik made an ill-timed move into bonds, which prompted shareholders and critics to question his sanity. One bad call overshadowed years of good performance.
That increased the entire industry’s focus on style purity. As a result, most small-cap stock managers can’t buy bonds or large-company stocks, even if that’s where they see the best current value for shareholders. That’s good from the standpoint of constructing a portfolio where each fund has a specific job, but it sometimes forces managers to endure downturns.
And then there is asset size. Good performance brings boatloads of money; most funds don’t turn the cash away and many managers can’t handle the change.
Big funds can still perform well, but it’s hard to make the transition from small to large while maintaining the kind of consistently superior performance necessary to cement a legend.
“The search for the star manager is almost futile, like trying to find the next Babe Ruth before you’ve seen him play a lot of games,” says G. Edward Noonan, president of Triad Investment Advisory in Hingham, Mass. “You won’t know who the true superstar is until they have 10 or 15 years of superior performance, at which point they may be ready to retire and it may be too late.”
That also means being patient with above-average managers in down years. Many experts believe the mark of a real star is not in the performance so much as in a clear and distinct style. Even superior managers will have down years, but their well-defined methodology and its ability to deliver in most years should inspire the faith needed to hold on in the hard times.
“The superstars had firm philosophies,” says Morningstar Inc. president Don Phillips. “Look for managers whose style, rather than performance numbers, you believe in. That’s the way to find a manager with the potential to become a legend.”
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Charles A. Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.
