Go for Team Approach to Portfolio Managing

Imagine Michael Jordan getting traded to the Clippers. Or Bob Welch and Dave Stewart returning to the Dodgers. In sports, a big personnel move can change the fortunes of a team overnight. The same holds true on the mutual fund playing field.

Portfolio managers aren’t traded, of course, but they do move around, switch allegiances, retire and die. And when a transition occurs, it alters the outlook for the investors left behind. For this reason, you might consider a fund run by a team of managers, rather than place all your bets on a single person who could depart without your knowing.

When a fund with only one manager loses that person, the relevance of the fund’s track record is thrown into question. The debate’s still raging as to whether Morris Smith can fill Peter Lynch’s shoes at Fidelity Magellan, the largest and best-performing fund over the past 15 years.

Because Lynch was so well known, his decision to retire last year made headlines. With most other funds, managers come and go in relative obscurity. Many investment companies don’t want to publicize a firing or demotion, nor do they want the world to know that a star is leaving since investors might follow.

The Securities and Exchange Commission doesn’t require managers to be named in the prospectus, although the agency is contemplating a change in that policy. The period for public comment on the change has expired, and a decision from the SEC could be announced as early as June.

Personnel movements are fairly common, even among the most successful funds. Of the 20 top non-team funds over the past 10 years, 11 had new managers at one time or another.

Managers who are employees of an investment company, rather than partners or principals, are much more likely to move on, says Craig A. Litman of the L/G No-Load Fund Analyst, a San Francisco newsletter. “We like to see managers with some ownership stake in the company they work for.”

Of course, funds run by teams can also be buffeted by personnel changes. In March, Carlene Murphy and Richard Weiss of the highly successful SteinRoe Special Fund of Chicago headed up the road to Milwaukee and the Strong family of funds, lured by an ownership position in the firm. However, moves involving two or more members of a team are rare. “With a team approach, the chances of a major disruption are less, although they do exist,” Litman says.

Team management styles vary: At 20th Century Investors of Kansas City, Mo., buy and sell decisions for all equity funds are made jointly at meetings of the five portfolio managers; at American Funds of Los Angeles, individual funds are divided into segments, each run autonomously. Twentieth Century and American each have two funds ranked in the top 25 over the past 15 years, according to Lipper Analytical Services.

The Pioneer Group of Boston has introduced a Europe Fund that might set the standard for team management on a global scale. Pioneer has hired investment advisers in Britain, France, Germany, Holland, Italy and Spain, and has given them a free hand to pick stocks in their local markets for the fund.

“This group of firms should have better access to research information, and their local traders should be able to get better prices,” says Norman Kurland, a Pioneer vice president who will oversee the fund and allocate assets among the various markets. “The typical European fund has two or three people sitting in Boston or New York,” he says. “What we’ve done is get a whole firm in each country to follow that market.”

Investment companies that use a team approach have had some notable successes over the years. Of the 25 top funds tracked by Lipper over the past decade and a half, 10 feature some sort of shared management, including the two funds each from 20th Century and American. These results challenge the notion that a team approach would tend to result in compromise and thus mediocre performance.

Nor can you assume that a jointly managed fund will be any more or less volatile than others. “Psychological studies have shown that a group will often take more risks than an individual,” says Hersh Cohen, who with Harold Williamson runs the Shearson Lehman Bros. Appreciation Fund, another portfolio with a good long-term record.

Are two or more heads better than one? In terms of continuity, yes. In terms of performance, there’s no clear answer, although proponents of the team approach feel that discussion and debate can result in superior stock selection and better gains. “We often disagree,” says Cohen, “but there’s a healthy give and take, a creative friction.”