Mutual Fund Monday - Beverly Goodman

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Respect Your Elders -- They Make Better Fund Skippers

Beverly Goodman

Domestic stock funds run by managers (or management teams) who have been at their fund's helm for more than 20 years have lost far less than the average U.S. equity fund.

And yes, the corollary also is true: Domestic stock pickers with fewer years under their belts performed worse than average.

"In general, you'd expect people who have 'been there, done that' to be able to handle the rough times of a bear market better than their less experienced counterparts," says Morningstar fund analyst Dan Culloton, who conducted the survey.

Still, the difference was surprisingly stark.

Funds managed by people with more than 20 years of tenure lost 9.8% on an annualized basis between the market's peak (as measured by the Wilshire 5000) on March 24, 2000, and Oct. 16, 2002. Over the same period, the average domestic stock fund lost an annualized 16%. Funds managed by managers with less than four years of tenure -- the typical fund manager tenure -- lost an annualized 17.5%.

Fewer than 60 funds (not counting all share classes) in the Morningstar database have managers who have been at the helm for more than two decades -- and the bulk of the funds that do fall into the hybrid, large-blend and large-value categories. Clearly, that conservative bent helped mitigate losses in the disastrous equities market of the past two years.

Likewise, while Morningstar did not perform a similar study of tenure during the boom years, "I'd expect you'd see these same managers lagging a little because of the conservative nature of their funds," Culloton says.

Two factors contribute to why less-aggressive equity funds have longer manager tenure: maturity and trend-shunning. "As managers get older, they often get more careful and deliberate in their processes," Culloton says. "Plus, in the late 1990s, a tremendous amount of new growth funds were introduced at the height of the bull market." Even though many of those funds have since folded or consolidated, the universe is still somewhat skewed towards an abundance of young growth funds.

Don't Be Ageist

The shining examples of manager tenure would hardly surprise most fund investors. Dodge & Cox's (DODBX Quote)Balanced and (DODGX Quote)Stock funds; (ACRNX Quote)Liberty Acorn fund and Mairs & Powers (MPGFX Quote)Growth fund all have stellar records and significantly experienced stock pickers.

The management team behind the Dodge & Cox funds has an average tenure of 36 years; Acorn's Ralph Wanger has managed the fund for 30 years; and George Mairs has been at the helm for 22 years. In addition, William Ruane has managed the Sequoia fund for 32 years, consistently beating the market in all but the most bullish of years.

Despite their longevity and success, though, some stalwart funds -- like Fidelity's (FMAGX Quote)Magellan -- were notable omissions from the 20-year club, since their current managers are fairly new. (Magellan manager Robert Stansky took over the fund in 1996.)

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Other favorite funds that have done better than average both in the bear market and over time, but just missed the 20-year manager mark are (WPVLX Quote)Weitz Partners Value fund and the (CFIM Quote)Clipper fund. Wally Weitz and Clipper managers James Gipson and Michael Sandler have been managing their funds for 18 to 19 years.

Not all of the members of the winning 20-year club steer conservative funds -- and not all beat shorter-tenured managers during the bear market. The notoriously volatile (LOMCX Quote)CGM Capital Development and (LOMMX Quote)CGM Mutual funds, headed by Ken Heebner, are the most notable exceptions. Despite racking up impressive gains at many points in his career, Heebner's concentrated funds failed to beat the majority of their category peers during the bear market. (Then again, because of their sector and geographic bets, these funds are almost impossible to categorize.)

So while age should come before beauty, manager tenure clearly should not be your sole reason in choosing a fund. The fund's style is of primary importance, with expenses running a close second. But if everything else seems equal, consider how long a manager has been doing his or her job -- at this fund or a similar one -- and don't hesitate to show some deference to the elders.