Investor's Business Daily, March 7th, 2007
Fund managers have to pick stocks, but fund firms have to pick the stock pickers.
Choosing top talent has a big payoff: performance for shareholders, who then send in more assets from which fees are extracted. But the process is fraught with difficulties.
A sampling of several firms gives an idea of how approaches differ.
Fund firms that rely heavily on fundamental and technical analysis tend to favor managers who are neither the lone ranger nor the one who seeks complete consensus.
Eileen Rominger, chief investment officer for the $27 billion in Goldman Sachs Asset Management's value team, said she tries to avoid "presentation bias," in which the best orator or Powerpoint 13anipulator gets his or her ideas heard while others languish.
She says she usually avoids using Powerpoint 14 meetings herself.
Managers, she says, can make moves at their discretion with anything up to 1% of the portfolio.
Beyond that, Rominger sets up a meeting with her team, with one person serving as the designated contrarian. Before the meeting she asks other team members to submit anonymous evaluations to both her and the person who generated the idea. The designated contrarian's job is to poke holes in the new idea, drawing on what the other team members have submitted.
The structure guards against groupthink. It also helps separate the really good ideas from the merely least objectionable. Left alone, groups tend to gravitate to ideas that nobody dislikes rather than those that anyone thinks are really good, Rominger says.
Methods also reflect long-standing corporate cultures. Fidelity Investments, the largest fund group with $1.13 trillion under management, has a history as a manager-driven shop. It leaves decisions almost entirely in the individual portfolio manager's hands.
Spokeswoman Sophie Launay says each manager has the help of a team of analysts and has an individual method of decision-making.
No Committees
A similar philosophy holds at Lord, Abbett & Co., which manages $113 billion. "I don't think committees work," said Thomas O'Halloran, partner and portfolio manager.
But managers need analysts' expertise to make good decisions. "One person can't do the job," O'Halloran said.
T. Rowe Price has a long history of hewing closely to its funds' investment objectives. Spokesman Steve Norwitz says it's important for investors to know what they are getting and that managers' methodology reflect that stated goal.
The firm has a two-tier method. The fund manager works with an advisory committee of analysts and fellow managers that meets regularly to discuss strategies. This group vets the manager's ideas and may propose new ones. This covers most basic day-to-day decisions.
Above that is the steering committee. That committee gets involved only when a change might affect the fund's style, move outside its stated objective or take on too much risk. The manager goes to the committee and explains what he is doing.
Michael Carmen, fund manager and partner at $575 billion Wellington Management, says the firm doesn't have a chief investment officer, as there are too many areas for one person to oversee.
Instead, he has a morning meeting with dozens of staff analysts and fund managers, often with written questions submitted beforehand.
Fast Talk
The meeting is done in 30 minutes. The team may ask Carmen about his strategy, while he taps its expertise on a given industry or company. He also speaks to one or more analysts to check his investment theses.
MFS Investment Management, with $175 billion in assets, also gives managers a lot of discretion. But like T. Rowe, the firm has a committee that vets changes that might alter a fund's style.
David Connelly, MFS' director of retail investment product management, says the quantitative analysis team goes over changes with fund managers. MFS chief investment officers review them twice a year, offering a backstop to manager's decisions.
Copyright 2007 Investor's Business Daily, Inc.
