Spotlights shine on portfolio managers, but the research departments that stand quietly behind them can be just as important
Spotlights shine on portfolio managers, but the researchdepartments that stand quietly behind them can be just as important.
If you're like many investors, you pay attention to the reputation ofa fund's portfolio manager, but you don't give much thought to the researchdepartment that backs up the chief. That may be a costly mistake, becauseresearch can have at least as big an impact on returns as the person incharge.
As a former director of research for a major Wall Street firm, I've learnedto appreciate how important analysts are to the investment decisions a portfoliomanager makes. In many firms, the manager is too busy with the fund's day-to-dayoperations to visit each company personally. A good analyst will visit thefirm and talk with its top executives and, whenever possible, with its rank-and-fileworkers, as well as with competitors, customers, and vendors. The analyst'ssuccess or failure at digging out fresh information will affect how lucrativethe manager's investments prove to be.
Before they send their analysts into the field, the best fund companiestrain them rigorously in the firm's style of investing. For instance, NeubergerBerman's analysts know what to look for in a value stock, and those at Janusare skilled at finding the best growth plays. In the international area,it's hard to beat the experience of the analysts at Lazard or Warburg Pincus.For bonds, superb research comes from the folks at Pacific Investment ManagementCompany, better known as PIMCO. Cohen & Steers' analysts, led by fundmanagers Martin Cohen and Robert Steers, are tops in the real estate field.It's this all-on-the-same-page approach that helps these fund companiesprovide shareholders with consistently strong long-term results.
But having researchers who excel at a house specialty isn't enough toensure success. A firm must also establish a culture that allows its analyststhe freedom to contribute to its overall performance. I'm reminded of myvisit some 25 years ago to Capital Research and Management, the managementcompany for American Funds Group. Tired from a long flight to the West Coast,I expected to be escorted to a boardroom full of portfolio managers. Instead,I met informally with several bright, highly motivated analysts who, I quicklylearned, were responsible for most of the key buy-and-sell decisions. Eversince that trip, I've understood why many offerings in the American Fundsfamily have outperformed their peers so consistently.
A specialized analytical force also indicates the company is seriousabout research. Instead of having a single analyst follow the health careindustry, a large company might assign one person to cover pharmaceuticals,another to handle managed care, a third to investigate opportunities inmedical technology, and so on. Industry leaders such as Fidelity, Janus,Putnam, and Vanguard fall into this category. Fidelity, for instance, hasmore than a dozen analysts covering high-yield bonds alone.
The amount of money the portfolio manager personally invests in the fundprovides another hint about the quality of the analysts' research. Thisinformation isn't readily available in reports from major rating servicessuch as Morningstar and Value Line Publishing, but it's worth a call tothe fund
company to try to discover it. Why is this so important? Because a portfoliomanager who has a lot of his own cash invested alongside his clients' willbe less likely, I think, to place big bets based on research that mightbe weak.
An even better sign is when the analysts themselves invest in the fund.Perhaps that's one reason why Southeastern Asset Management, which offersits financial products through Long-leaf Partners Funds, requires all itsemployees and their immediate family members to make 100 percent of theirequity investmentsboth retirement and nonretirementin Longleaf funds.That obligation undoubtedly motivates the analysts to be come up with thebest possible recommendations.
I'm not suggesting that you buy or sell any fund solely because of thenumber of researchers it or its management company employs, how many frequent-fliermiles these people accumulate, or how much of their own money is tied totheir work. Nevertheless, when the market gets choppy, you'll want to knownot only who's at the helm of your funds, but who's helping that personsteer it in the right direction.
Lewis Altfest. Who really makes a mutual fund succeed?.