Analyst-Run Funds Put Their Stock in Research

If you believe in researching companies thoroughly before you buy shares in them, youprobably would like the analysts to call the shots at your mutual fund. And you can guarantee that at one of the many new analyst-run mutual funds.

These investments take stock research to an extreme. Rather than rely on one or two portfolio managers to make buy and sell decisions, the funds let upward of two dozen analysts call the shots.

“It’s a sensible way to manage money,” said Thomas Bogan, associate director of global equity research at Putnam Investments in Boston. “The analysts are experts in the companies they follow, so why not let them make the decisions directly?”

It’s hard to argue with that in light of the success that trailblazing MFS Research Fund ([800] 637-2929) has enjoyed.

Roughly two dozen MFS analysts discuss and then vote on their favorite ideas once a week. Their efforts have generated a 22.5% annualized gain over the five years ended June 30, beating the average growth fund by more than 3 percentage points a year.

Boston-based MFS added a growth and income fund run by analysts last year and an international version at the start of 1998. Putnam and State Street Research, also of Boston, recently unveiled their own analyst-run funds. Morgan Stanley Dean Witter has a similar portfolio, called its Best Ideas Fund ([800] 843-3326).

The fact that analyst-run funds bring so many researchers into the process isn’t their only selling point. After all, portfolio managers of traditional funds are constantly fed stock tips by analysts at the larger firms. Yet portfolio managers don’t always act on such information.

“With this fund, I can act quicker,” said John Borzilleri, a pharmaceuticals analyst who helps run State Street Research Galileo. “With other funds, I have to convince the portfolio manager about what we should buy or sell.”

Analysts are specialists who typically track perhaps two to three dozen stocks in a particular industry. By contrast, a portfolio manager might have his or her eyes on hundreds of companies.

This results in a situation in which the typical manager can’t possibly devote the same degree of oversight to every stock in the portfolio, says David Antonelli, assistant director of research at MFS. He believes managers also are more subject to investment biases because they naturally will understand and thus favor certain industries over others.

Analysts often uncover promising stock ideas earlier in the process than portfolio managers. Borzilleri, an MD, recommended Pfizer shares three years ago, well before the firm’s Viagra became a hit. His bullish stance on the medication was formed by attending medical conferences and talking with urologists as the drug was being tested.

“You rarely see portfolio managers at these kinds of meetings,” he said. “‘If they have to cover 20 or more industries, they just don’t have the time.”

Bogan tells of one Putnam analyst who made a visit to one of Nokia’s cellular-phone factories in Finland’s Arctic Circle: “He came back with a real understanding of Nokia’s production capabilities for hand-held phones. I can’t imagine a portfolio manager taking a trip like that routinely.”

Analyst-run funds may be even more effective in overseas markets, Antonelli believes, because foreign stocks are less widely researched than U.S. equities. MFS Research International is run by roughly 20 foreign stock analysts primarily located in Boston but with a few in London and Singapore. Weekly stock-selection meetings are conducted via teleconferencing.

One aspect that separates analyst-run funds from one another is how they decide the industries in which to choose stocks.

State Street Research Galileo ([800] 882-0052), which debuted in March, invests in all key industries found in the Russell 1,000 index in roughly the same proportions. Putnam Research ([800] 225-1581), which opened in June, closely tracks the industry weightings of the Standard & Poor’s 500. By contrast, the three MFS research funds are not tied to industry weightings of any index.

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Russ Wiles is a mutual fund columnist for The Times. He can be reached by e-mail at russ.wiles@pni.com.