Don’t Envy the Rich Their Money Managers

The rich can afford bigger homes, fancier cars, snootier schools for their kids. They can also get the services of private money managers. But will they get better performance than middle-class folks who invest in mutual funds? Not necessarily.

In terms of performance, mutual funds are surprisingly competitive with private money managers, and they offer a wider range of investment choices. Most funds can be purchased by anyone with as little as $250 to $3,000 to invest.

By contrast, private money managers--those who cater to wealthy individuals and institutions--are generally beyond the reach of people with less than $250,000 to invest. A few managers accept portfolios as small as $25,000 or $50,000, while others insist on assets of $1 million to $5 million or more.

Fees vary, too. On smaller privately managed accounts, investors can expect to pay 1% or more each year on the assets in the portfolio, plus transaction costs for buying and selling securities. For bigger portfolios, there’s usually a proportionately smaller fee.

Private money managers come in all shapes and sizes. Some are one-person outfits, while others work for brokerages, bank trust departments and even mutual fund companies. Mutual funds evolved largely as a means of attracting smaller investors who couldn’t qualify for individual portfolio supervision. More than a few fund managers also supervise personal accounts on the side, and vice versa.

As a whole, money managers appear to have delivered better results than mutual funds, but not by much. CDA Investment Technologies of Rockville, Md., monitored the performance of 76 money management companies catering to wealthy equity investors during the 10 years ended June 30. CDA found that the average manager posted a 17% annual compounded gain for the period--about in line with the Standard & Poor’s 500-stock index.

The average equity mutual fund rose at a 15.3% annual clip over the same period, according to Lipper Analytical Services. But it’s hard to make exact comparisons, in part because all mutual fund results are net of management fees and other expenses. That’s not the case for every money manager included in the CDA survey.

Also, all fund performance numbers are audited and easily verifiable. The same can’t be said for all money manager results.

At any rate, nearly one in three domestic and international equity funds with 10-year records beat the CDA average for money managers. That suggests that if you invest in superior mutual funds, you can expect returns at least as good as those available through private managers.

If most private money managers can’t beat the market or the average mutual fund by more than 1.7 percentage points a year, why do many rich investors flock to them? Personalized service is the main answer. “There will be somebody to guide you and to tell you where to put your money to work,” says Olin Barrett, a managing director who supervises large personal accounts in Los Angeles for Scudder, Stevens & Clark, the Boston-based mutual fund company.

Investors receive a portfolio of stocks and bonds that’s tailor-made to reflect their income needs, risk tolerance and the like.

But this still doesn’t explain why private money managers require such large accounts. On the one hand, it’s a matter of diversification and liquidity. To reduce the impact of a particular company going down the drain, most managers will develop a portfolio with at least a couple of dozen stocks.

And to get the best prices, they will trade in blocks of 100 shares each, known as round lots. “You might need to buy 500 or 1,000 shares to get a decent break on the commission,” says Fred Astman, chairman and portfolio manager of First Wilshire Securities Management in Los Angeles.

In addition, money managers charge a minimum annual fee, as well as transaction costs. These expenses could quickly erode a portfolio of insufficient size.

Scudder, for example, charges a minimum of $7,500 a year on private stock-oriented accounts. “There’s no specific limit on portfolio size, but the fee schedule is such that somebody should have $750,000 or more,” Barrett says. That would limit the annual fees to 1% or so--a widely followed benchmark.

At First Wilshire Securities Management, which achieved a stellar 21.8% average annual compounded return during the 1980s on accounts monitored by CDA, the minimum yearly fee runs $1,000. Astman prefers clients with at least $100,000 to invest.

Ironically, some money managers place a portion of their clients’ assets in mutual funds. This might seem strange until you consider that most managers don’t have expertise in certain exotic investment areas, such as international stocks and bonds. The funds provide an easy way to get exposure in these sectors.

At Scudder, for example, a typical $750,000 individual portfolio might be spread around 20 to 25 stocks as well as some international funds and municipal bond funds. Munis are notoriously illiquid and thus can be bought and sold more easily through a fund, Barrett says.

Some wealthy folks shun the private-management route altogether in favor of mutual funds. “We have dozens of accounts where people have put $1 million or more into one or more funds,” says Tim Pitts, executive vice president at Oppenheimer Funds in New York.

Companies that levy front-end sales charges on their funds typically reduce or eliminate the fees on big purchases. For example, Oppenheimer, which imposes loads ranging from 4.5% to 8.5% on small investments, reduces the charge to 0.25% on purchases of $4 million or more.

Pitts expects to see more people making big-dollar investments in mutual funds. A whole generation of baby boomers, he explains, has grown up buying funds because they couldn’t afford much else. As individuals in this group grow wealthier--thanks to inheritances, pension-plan distributions and their own labor--many will stick with the products they know best.

If you’re fortunate enough to join the ranks of the wealthy, you will have the opportunity to hire a private money manager. Just don’t assume that this investment approach will prove more profitable than a tried-and-true mutual fund.

After all, private money managers face most of the same investment challenges that fund managers do. At some companies, the same person wears both hats. In fact, it’s not misleading to think of an individually run portfolio as just another type of mutual fund--one with your name attached.

MUTUAL FUNDS VS. PRIVATE ACCOUNTS Can you get better results from a private money manager than from mutual funds? Not always.

Most mutual fund companies have their own private management divisions, designed to cater to high net worth individuals. Yet sometimes the funds do better than private accounts run by managers employed by the same firm.

The following chart lists the performance of all general equity funds with 10-year track records at four leading mutual fund companies; it also includes returns for privately managed accounts at the same firms.

Average annual Fund/Private accounts compounded returns Fidelity Magellan +26.7% Fidelity Destiny I +20.5% SteinRoe Special +20.4% T. Rowe Price International Stock +18.5% Fidelity privately managed accounts +18.0% Scudder International +17.8% Fidelity Equity-Income +17.4% Scudder Capital Growth +17.2% Fidelity Fund +17.0% Fidelity Puritan +16.8% Fidelity Contrafund +16.6% Scudder privately managed accounts +15.2% Fidelity Value +14.9% SteinRoe privately managed accounts +14.7% Fidelity Trend +14.4% SteinRoe Stock +14.4% Scudder Growth & Income +13.9% Scudder Development +13.8% T. Rowe Price Growth Stock +13.1% T. Rowe Price privately managed accounts +12.5% T. Rowe Price New Horizon +12.4% SteinRoe Capital Opportunities +11.8% SteinRoe Total Return +11.7%

Average annual compounded returns, from CDA Investment Technologies and Lipper Analytical Services, are for 10-year period ending June 30, 1990.

HOW MUTUAL FUNDS PERFORMED Average total return, including dividends, in percent for periods ended Thursday, July 26.

TOP 10

Fund Type Notes 12 mos. Yr. to date Week Strategic Investments AU L -7.90 -33.95 +5.88 U.S. Gold Shares AU NL +8.45 -22.91 +3.61 International Investors AU L +11.68 -16.79 +2.90 Keystone Precious Metals AU NL,R -2.03 -15.51 +2.68 Sherman, Dean Fund CA NL +2.43 -8.75 +2.54 Fidelity Select: Energy Service NR LL,R +47.08 +21.69 +2.46 Franklin Gold Fund AU LL +15.62 -8.31 +2.40 Lexington Goldfund AU NL +6.83 -11.42 +2.35 Enterprise Precious Metals AU L +7.04 -5.91 +2.34 Fidelity Select: Precious Metals AU LL,R +5.24 -12.88 +2.28 BOTTOM 10 Prudent Speculator: Leveraged SG NL -19.76 -6.98 -8.01 Vanguard Intl. Eq. Idx.: Pacific PC NL * -2.20* -6.60 Steadman Oceanographic G NL -3.04 -3.04 -6.36 Fidelity Select Electronics TK LL,R +41.36 +31.87 -6.15 Steadman Associated Fund EI NL +0.00 +1.32 -6.10 Nikko Japan Tilt Fund PC LL,R -17.18 -23.06 -5.91 New England Growth Fund G L +10.55 +9.33 -5.70 SLH Small Capitalization Fund SG L +5.92 +7.27 -5.52 CGM Capital Development G NL +10.16 +13.28 -5.45 Fidelity Select Software TK LL,R +22.86 +8.89 -5.38

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.

NOTES: NL means no sales charge, LL means sales charge of 4 1/2% or less; L means sales charge of greater than 4 1/2%; R means redemption fee may apply.

* Fund established June 18, 1990.

Source: Lipper Analytical Services