Do You Know Who’s Managing Your Portfolio?

Peter Lynch certainly shocked the world of mutual funds last month with an announcement that he would soon retire as the superstar portfolio manager of the Fidelity Magellan Fund, where a sizzling long-term track record has attracted 1 million shareholder accounts.

His retirement at the age of 46--in essence, he said it was time to smell the roses--highlights some lingering questions about mutual funds:

How much does a fund’s performance depend on who’s managing it? Is a change in portfolio managers likely to make a significant difference? How critical is the role of one individual?

Should mutual fund shareholders be advised when a change is made in portfolio managers? Should mutual funds identify their portfolio managers at all? How exactly should they do that?

In many and perhaps most cases, management of a fund is handled by just one individual who makes day-to-day decisions on what securities to buy or sell and at what prices. In other cases, a fund’s investments are handled by co-managers, teams or committees. Whatever the structure, managers operate within policy guidelines and under the supervision of boards of directors or trustees.

Given the central role of managers, you would think that funds might be required to tell investors who they are and when they quit, retire, die or are fired. They don’t.

The Investment Company Act of 1940, the framework for mutual fund regulation, only requires that a fund report the name of the investment adviser--generally a firm with responsibility for portfolio management under a contract with the fund.

Portfolio managers are usually employees of the investment adviser. Sometimes, the portfolio manager and the investment adviser are one and the same. (For example, at Nicholas Co., where Albert O. Nicholas, portfolio manager of the Nicholas Fund and others, is the only stockholder.) At other firms, managers may be minority shareholders as well as employees.

For many mutual fund investors, knowing the name of the investment adviser is not enough. A company name doesn’t tell them much. They also want to know the individual actually making investment decisions. When comparing several funds’ performance records--a critical step in deciding which of them offer the best opportunities--investors want to know whether the managers responsible for the funds’ performance track records are still in charge.

To accommodate investors, the Securities and Exchange Commission staff proposed twice in the past decade--1982 and 1984--that funds make public the names of portfolio managers. On both occasions, the proposals were withdrawn in the face of strong opposition by the mutual fund industry. A number contended that investors were really investing in the investment advisers who had contractual obligations with the mutual funds, not in individuals who could leave any day.

At least since the mid-1980s, however, some fund management companies have tried to have it both ways. Apparently regarding their managers as personalities whose market comments could help to sell fund shares--or whose reassuring words could help to discourage redemptions at the time of a “correction”--funds began to give them higher visibility. Increasingly, portfolio managers’ comments were published in mutual fund annual reports; profiles about them appeared in newsletters distributed to shareholders, and they were widely available for newspaper, magazine and television interviews.

With the greatly increased investor interest in mutual funds and their portfolio managers, the SEC staff last January submitted a new proposal for public and industry comment. It would require that a fund’s prospectus provide disclosure “about all the persons who significantly contribute to the investment advice relied on to manage the fund’s portfolio.” It also would require a fund to notify investors of a change by means of a sticker applied to the mutual fund’s prospectus, which already includes detailed information about investment objectives, performance, fees and other matters.

The Investment Company Institute, the industry’s trade association, criticized these provisions for being too sweeping, requiring too much information about too many people and adding unnecessarily to the cost of preparing a prospectus. The institute prefers to limit disclosure to those portfolio managers who are promoted publicly and whose retention is critical to a fund’s success.

There were some who supported the SEC staff proposal, however. John C. Bogle, chairman of the Vanguard Group, supported it on grounds that investors had the right to know, and added that funds should spell out their management process. (Wellington Fund’s recently released prospectus is the first in Vanguard Group, and perhaps the industry, to describe the credentials of a portfolio manager: Vincent Bajakian, who has run it since 1972.)

Just as the SEC staff was going through the responses to its proposal, Fidelity Magellan’s manager, Peter Lynch, decided to, as he put it, “turn in my Quotron.” Fidelity acted quickly to disseminate the news, including the appointment of Morris Smith, portfolio manager of the Fidelity OTC Portfolio, as Lynch’s successor. It pasted stickers on prospectuses, prepared a flier to be mailed with confirmation statements to those buying Magellan shares and announced that it would move up production of the annual report for the fiscal year ended March 31.

Fidelity let it be known, however, that this was an unusual case and not necessarily a pattern that will be followed when other managers leave.

While the sticker may be an industry first, the mention in the annual report won’t be. T. Rowe Price, for example, used the 1988 annual report of its Capital Appreciation Fund to announce that Richard P. Howard had succeeded Richard H. Fontaine as its manager. It’s a rarity, though. Scudder, Stevens & Clark, for instance, did not report on the resignation of Andrew Massie Jr. last year, even though he left only weeks after being identified as “manager of the top-ranked Scudder Capital Growth Fund” in the summer 1989 edition of its shareholder newsletter. When Massie quit, the company took the position that he had been “one of several highly talented professionals” who manage the fund and that “the fund’s management team remained substantially in place.”

When all is said and done, how much does a change really affect a fund’s performance? Industry students such as A. Michael Lipper, president of Lipper Analytical Services, and John Markese, research director of the American Assn. of Individual Investors, agree that it’s very hard to calculate.

To see just how hard, take a look at the accompanying table and see if you can rely on year-to-year performance figures to pick out which funds experienced a change in management. A fund’s annual return can fluctuate sharply even without a managerial change. Fidelity Magellan, for one, has underperformed the overall market in some years while the same manager remained at the helm.

“Even if it’s tough to correlate,” Markese says, “people should have the information about a change as soon as the event is known. They want the information.”

WHICH OF THESE FUNDS CHANGED MANAGERS--AND WHEN?

QUESTION: Five of these six mutual funds changed portfolio managers during the years tabulated. Can you figure out which five and when they changed? (“Peer group” refers to funds with similar investment objectives.)

TOTAL RETURN Year S&P; 500 Fund A Peer Group 1984 6.1 % - - 1985 31.6 68.6 % 31.7 % 1986 18.6 11.4 6.6 1987 5.1 1.6 -5.6 1988 16.6 22.9 19.3 1989 31.7 30.4 23.0 S&P; 500 Fund B Peer Group 1984 6.1 % 2.0 % -2.6 % 1985 31.6 43.1 27.8 1986 18.6 23.7 13.4 1987 5.1 1.0 1.3 1988 16.6 22.8 14.0 1989 31.7 34.6 25.4 S&P; 500 Fund C Peer Group 1984 6.1 % 0.4 % -2.6 % 1985 31.6 36.7 27.8 1986 18.6 16.6 13.4 1987 5.1 -0.7 1.3 1988 16.6 29.7 14.0 1989 31.7 33.8 25.4 S&P; 500 Fund D Peer Group 1984 6.1 % -0.1 % -8.1 % 1985 31.6 24.6 26.6 1986 18.6 11.2 13.7 1987 5.1 4.2 1.8 1988 16.6 16.6 13.4 1989 31.7 46.3 23.9 S&P; 500 Fund E Peer Group 1984 6.1 % 3.3 % -8.1 % 1985 31.6 28.9 26.6 1986 18.6 14.1 13.7 1987 5.1 9.3 1.8 1988 16.6 15.5 13.4 1989 31.7 30.4 23.9 S&P; 500 Fund F Peer Group 1984 6.1 % -27.1 % -26.5 % 1985 31.6 -4.5 -4.8 1986 18.6 36.8 33.0 1987 5.1 71.6 33.5 1988 16.6 8.4 -14.5 1989 31.7 34.6 22.5

ANSWER: Fund A is Fidelity OTC Portfolio, a Small Company Growth Fund, where Morris Smith replaced Paul Stuka in 1986. Fund C is Scudder Capital Growth Fund, a Growth Fund, which Andrew Massie, Jr. left in 1989. Fund D is Janus Fund, Capital Appreciation, which James Craig took over in 1987 after serving as co-manager with founder Thomas Bailey. Fund E is Fidelity Freedom Fund, also Capital Appreciation, which had two changes: Michael Kassen for George Vanderheiden in 1985 and Stuart Williams for Kassen in 1988. Fund F is Oppenheimer Gold & Special Minerals Fund, Gold-Oriented, whose Milton Berg was succeeded by Kenneth Oberman in 1987. Oh yes, Fund B is Fidelity Magellan, also a Growth Fund, which didn’t change managers during the period.

Sources: Lipper Analytical Services, Standard & Poor’s

HOW MUTUAL FUNDS PERFORMED

Average total return in percent, including dividends, over the 10-year period March 31, 1980, to March 31, 1990.

TOP 10

Fund Type 10 Years Fidelity Magellan Fund G 1,167.9 % Merrill Pacific Fund Class A PC 880.46 CGM Capital Development G 669.97 Lindner Fund G 660.25 Japan Fund PC 643.75 Janus Fund CA 625.29 SteinRoe Invest: Special Fund G 606.32 Phoenix: Growth Fund G 598.55 New England: Growth Fund G 595.72 Phoenix: Stock Fund CA 587.41

BOTTOM 10

Fund Type 10 Years 44 Wall Street Fund CA -67.63 % American Heritage Fnd CA -42.28 Steadman Oceanographic CA -28.31 Steadman Amer Industry CA -18.94 Steadman Investment G 14.04 Strategic Investments AU 18.08 Sherman, Dean Fund CA 44.81 Bull & Bear Gold Investors AU 71.79 Steadman Associated Fund EI 81.51 Afuture Fund G 91.56

TYPE: AU = gold, B = balanced, CA = capital appreciation, CV = convertible securities, EI = equity income, EU = European regional, FI = fixed income, FS = financial securities, FX = flexible portfolio, G = growth, GI = growth and income, GL = global-international and U.S. stocks, GX = global flexible portfolio, H = health/biotechnology, I = income, IF = international, MI = mixed income, NR = natural resources, OI = option income, PC = Pacific regional, RE = real estate, S = specialty/misc., SG = small company, TK = science and technology, UT = utility, WI = world income.

Source: Lipper Analytical Services

HIGHEST SAVINGS YIELDS

Highest yields reported by federally insured banks and thrifts as of April 4 based on the lowest minimum deposit to open an account. National average based on yields offered by 100 largest banks and thrifts in the 10 largest markets. Southern California averages based on yields offered by 10 largest area banks and thrifts. MONEY MARKET ACCOUNT National average: 6.25 S. California average: 5.82 Metro. Bank for Svgs, Leesburg, VA: 8.34 Blackstone B&T;, Boston, MA: 8.33 First Dep Natl Bk, Tilton, NH: 8.32 Sequoia FdSvgsBnk, Bethesda, MD: 8.30 Bank of New England, Boston, MA: 8.30 6-MONTH CD* National average: 7.88 S. California average: 7.94 Connecticut B&T;, Hartford, CT: 9.00 Citytrust, Bridgeport, CT: 8.84 Maine Svgs Bank, Portland, ME: 8.78 Columbia S&L;, Irvine, CA: 8.76 Bank of New England, Boston, MA: 8.65 *Assumes re-investment of six-month CD at same rate to earn yield shown. 1-YEAR CD National average: 8.03 S. California average: 8.11 Connecticut B&T;, Hartford, CT: 9.00 Bank of New England, Boston, MA: 9.00 Maine Svgs Bank, Portland, ME: 8.89 Home Svgs Bank, Norfolk, VA: 8.78 Heritage Svgs Bank, Richmond, VA: 8.77 2 1/2-YEAR CD National average: 8.05 S. California average: 8.04 Maine Svgs Bank, Portland, ME: 8.89 Mercantile Bank, Boston, MA: 8.83 Citibank/SD Sioux Falls, SD: 8.81 The Fedl Svgs Bank, Baltimore, MD: 8.79 Home Owners Svgs, Burlington, MA: 8.68 5-YEAR CD National average: 8.09 S. California average: 8.04 Mercantile Bank, Boston, MA: 8.95 The Fedl Svgs Bank, Baltimore, MD: 8.89 Metro. Bank for Svgs, Leesburg, VA: 8.88 Eastern Svgs Bank, Hunt Valley, MD: 8.80 NVR Svgs Bank, McLean, VA: 8.80 SOURCE: 100 Highest Yields, Bank Rate Monitor, N. Palm Beach, Fla. 33408

MONEY FUND YIELDS

Highest seven-day compound yields for period ended April 3. Yields represent compounded rate of return to shareholders for past seven days. Past returns are not necessarily indicative of future yields. Investment quality and maturity may vary among funds.

GOVERNMENT ONLY Average: 7.74 1 Fidelity Spartan US Govt MMF k : 8.58 2 Benham Govt Agency Fund k : 8.57 3 Kemper Money Market Govt Port : 8.33 4 Transamerica US Govt Cash Res k : 8.31 5 UST Master Govt MF : 8.24 6 Vanguard MMR Federal : 8.23 7 Vanguard US Treasury : 8.19 8 The Galaxy Funds Govt Fund : 8.19 9 Conestoga US Treas Sec Fund k : 8.17 10 Mariner Government Fund : 8.16 k - Manager absorbs a portion of fund’s expenses. Source: Donoghue’s Moneyletter, Holliston, Mass. 01746 GENERAL PURPOSE Average:7.97 1 Dreyfus Worldwide Dollar MMF k : 8.85 2 Alger Money Market Portfolio k : 8.77 3 The Laurel Prime MM I Port k : 8.76 4 Fidelity Spartan MMF k : 8.73 5 INVESCO Treasurer’s MM Res k h : 8.63 6 Vista Premier Global MM k h : 8.46 7 Evergreen MM Trust k : 8.43 8 Strong Money Market Fund k : 8.41 9 Vanguard MMR Prime : 8.38 10 Salem Money Market Portfolio k : 8.37 TAX-FREE Average:5.57 1 Calvert T-F Reserve CA Port k : 6.41 2 Spartan PA Municipal MMP k : 6.41 3 Composite Cash T-E k : 6.30 4 INVESCO Treasurer’s T-E Res h : 6.27 5 Fidelity MI T-F/MMP k : 6.25 6 Calvert T-F Reserves MM : 6.17 7 Evergreen Tax-Exempt MMF k : 6.15 8 Reich & Tang/MI Daily T-F k : 6.15 9 Strong Municipal MMF : 6.13 10 Conestoga Tax-Free Fund k : 6.12