When evaluating funds, it’s easy to focus on individual funds rather
than the company that sponsors them. Although this makes sense, it’s
also a good idea to evaluate the company behind the fund. Studying the
fund company can tell you a lot not only about the fund itself, but
also about how long the manager’s likely to stay, how you’re likely to
be treated as a shareholder and how your fund performs in the long run.
mutual fund business is a very profitable one, and despite changes in
some of the rules governing mutual funds, the deck’s still stacked in
favor of the fund companies rather than the shareholders.
why when you’re investing your hard-earned money to fund your
retirement, your child’s college education or some other important
goal, you want a fund company that’s going to treat you right.
statistics are heavily weighted toward manager-related metrics. That’s
because, especially for actively managed funds, the manager (or
managers) is a key figure. Management-related metrics are also
relatively easy to measure. At actively managed funds, the manager
makes decisions about buying and selling securities. That’s in contrast
to the passive investment strategy employed at index funds, for which
the fund holds the securities that make up a particular market index.
The following are five ways you can evaluate your fund company and why they’re important:Returns
a shareholder, you’re likely invested in only one or, at most, a few
funds with a particular fund company. So what difference does it make
how the fund company as a whole ranks in terms of returns? It matters
because it says something about the quality of fund management and how
funds hold up during the long term.
To get a sense of how
a fund company’s returns stack up, Morningstar examined the
asset-weighted returns of the 30 largest fund companies. This method of
measuring returns averages out a fund’s asset size so that funds with
more assets can be compared with funds with fewer assets. In
Morningstar’s analysis, PIMCO, Harbor Funds, MFS, Janus and T. Rowe
Price were the top five in terms of three-year asset-weighted returns.
it’s better to judge a fund by a longer-term return than three years —
five and 10 years make the most sense — Morningstar’s director of
mutual fund research, Russel Kinnel, chose the three-year option to get
a sense of how the funds in a company’s current lineup stacked up
against each other. In this case, the past three years span the market
downturn of 2008 and the rebound during the past year, so it’s a
worthwhile way to compare fund companies.Manager Tenure
you’re buying shares in an individual mutual fund, you want an
experienced manager who has exhibited a good track record. If a fund
company has a good history of management staying put over the long
term, there’s a better chance that managers at each individual fund
will stay longer.
I prefer to invest in a fund with a
manager who’s been there for at least five years. That way, I can be
sure that the manager is responsible for at least the past five years’
performance. Although past performance is certainly no guarantee of
future returns, I’d rather invest my money with a manager who has
established a solid long-term track record than one who hasn’t.
average tenure among managers in the 30 fund companies studied by
Morningstar is 5.2 years. But the actual numbers vary widely.
& Cox, the highest-ranking fund family, has an astounding manager
tenure rate of 10.12 years, followed by Franklin Templeton Investments
at 10.05. Then there are two fund companies with tenure figures in the
eight-year range: American Funds at 8.88 years and GMO at 8.29.
After that, tenure rates drop into the neighborhood of six years for T. Rowe Price and MFS.
fund companies — Vanguard, Eaton Vance, Wells Fargo Advantage, American
Century Investments and Legg Mason/Western — have tenure rates in the
five-year range. The remaining 19 fund companies have average tenures
of between three and five years.
closely to manager tenure, this statistic tells you how successful a
fund company is in retaining its managers. Obviously, the better a fund
company is at retaining managers, the longer they’ll stay on the job.
When a fund company can retain managers, it lends stability to the
company’s overall lineup.
The top two fund companies in
this category have a manager retention rate of better than 97 percent,
which is pretty amazing. American Funds leads at 98.4 percent, followed
by Dodge & Cox at 97.2 percent.
Both of these fund
families employ a team management approach in which several managers
collaborate to oversee an individual fund, versus an individual manager
making all the decisions. Of the 30 funds included in the report, only
nine had manager retention rates of 90 percent or above. The other 21
had rates between 80 percent and 90 percent, with the lowest-ranking
fund family, Goldman Sachs, recording an 81.4 percent retention rate.Management Investment
fund managers invest along with their shareholders, they have some skin
in the game. They’re putting their own money on the line, which means
that their personal fortunes, to a degree, rise and fall with the value
of the fund they’re managing.
So the average amount that a
manager at a fund company invests in his or her own fund, or in the
other funds operated by the company, is important. And it’s no accident
that the same fund companies that have high manager tenure and
retention rates have the largest average manager investment amounts.
& Cox wins the prize here, with an average manager investment of
$860,000, significantly more than the second-place company, American
Funds, with an average manager investment of $582,051. Third is Janus
Funds, with an average manager investment of $517,857.
After that, the numbers drop off pretty steeply:
Rowe Price, which is No. 4, has an average manager investment of
$219,948 and No. 5 MFS has an average of $202,698. The other 25 fund
companies have average manager investments of less than $200,000, with
ING Funds last at $13,633.Stewardship
Morningstar grades funds on stewardship, which is made up of several metrics, including:
Although an individual fund’s fees are more important than the fund
family’s fees collectively, how a fund family manages fees overall is
important. Some fund families have a reputation for higher fees and a
history of increasing fees; others keep their fees low and don’t add
unnecessary ones such as 12b-1 marketing and distribution fees.
quality: Morningstar favors boards that are composed of 75 percent
independent directors — those not affiliated with the fund company —
and who have meaningful investments in the funds they oversee.
issues: If a fund company has had a serious recent issue with
regulators, you might want to think twice about investing in it. Many
fund companies were caught up in the scandal of 2002 and cleaned house
as a result. There haven’t been any major scandals since, but it’s a
good idea to keep your eyes open on this issue.
grades funds on an A to F scale for each element of stewardship and
gives a composite grade. You have to subscribe to gain access to the
stewardship grades, but you can get a two-week trial membership for
free if you just want to look up a fund family or two.The Impact of a Parent
evaluating a fund for potential purchase, the characteristics of the
individual fund are more important than the fund company that sponsors
it. But by taking a look at the fund’s parent company, you can tell a
lot about the fund and its chances of thriving in the future.