The must-read piece that everyone’s talking about today is Chuck Jaffe‘s meditation on why “star managers” don’t exist anymore in the mutual fund complex.
My own quick take is that we now have data at our fingertips on the performance of every style, sector, manager, fund family, stock, strategy etc. The magic is gone. Also, ETFs are cheaper and easier. Also, the most talented stockpickers and such have gravitated for the higher compensation to be had in the hedge fund game.
But most importantly, Bull Markets create stars, think Peter Lynch, Mario Gabelli, Bill Miller, Ken Heebner etc. Bear Markets create apathy for stocks and anyone involved or associated with them. Don Mattingly wasn’t Derek Jeter because when Jeter was on the Yankees they won every year and with Donny Baseball they couldn’t get themselves arrested.
Anyway, Chuck nails it…
End of an Era
Legends like Lynch or John Neff, long-time manager of Vanguard Windsor Fund, were made in an era before there were stars, specifically the symbols of Morningstar’s rating system. Morningstar introduced its ratings in 1991; by 2004, three-quarters of all new investments were flowing into funds with four- or five-star ratings.
Stars were born in that era — from the zenith of Lynch’s career at Magellan until ratings became a driving force in the industry — as mutual funds became Main Street’s investment of choice; hot managers regularly graced magazine covers and were lionized by a business media that confused a bull market with investing brilliance.
When the Internet bubble burst, and Morningstar style boxes showed that go-anywhere managers had changed tactics, the shine was gone. Lynch made a move into bonds during his time at Magellan, but it caused no uproar; his timing was early but ultimately the call paid off. His successor Jeff Vinik made the same call in the mid-1990s and was pilloried for it.
“It is clear that star managers are a thing of the past, although there are still a few hanging on,” said Geoff Bobroff, an industry consultant based in East Greenwich, R.I. “I would suggest that a manager really can’t run money like Peter [Lynch] did before Morningstar; Morningstar really puts a straightjacket on managers to stay in a still box. Thus, today you can’t buy a fund and expect that the manager will go anywhere to make money.”
Indeed, investors nowadays either want to control the process — either through use of index funds and an asset allocation plan or through funds where the manager follows a specific mandate — or they want one-size-fits-all portfolios. Instead of letting a fund manager navigate the market, they’re picking an asset-allocation plan and glide path for a lifetime, worrying less about finding a star than about reaching their goals.
No one needs a star manager to reach their goals. For people who wish they had one — who want a name they trust at the top — the stars of the future will be managers who deliver to investor expectations, rather than the ones who, like Lynch, show results beyond investors’ wildest dreams.