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All-Star Teams Are Good for Baseball, Not for Funds

So-called masters funds are good in concept, but haven't proven to be a home run.
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Over the years, there have been several seductive investment fads, and the late '90s are no different.

Some of you may remember Jerry Tsai and Bernie Cornfield of the '60s "go-go" funds, or the leveraged funding and partnerships of the '70s and the junk bonds of the '80s. In the '90s, we have boiler rooms of day traders opening up as fast as Vegas casinos and Internet stocks that trade for 650 times annual earnings -- if there are any earnings at all.

There are some things going on in the mutual fund world that, while not exactly extreme, are misguided strategies, in my estimation. Over the next few weeks, I will discuss four strategies, beginning with the first one today.

  • Funds with multiple star managers
  • Funds of funds
  • Classic asset allocation
  • Timing strategies

Multiple-Manager Funds

These funds are like a flashing multicolored neon marquee. They say, "Invest in me because I've got a team of stars."

During an interview on


, I was asked about the new

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Masters Select Equity fund shortly before it was launched in January 1997. My advice then was not to jump on the bandwagon just because the fund has some famous names. The managers do not function as a team, but their stocks do. The chemistry of stocks with different styles and sizes may or may not work well together.

The fund has six star managers: Shelby Davis (with

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Davis New York Venture fund), O. Mason Hawkins (with

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Longleaf Partners Small Cap), Spiro Segalas (with

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Harbor Capital Appreciation), Foster Friess (with

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Brandywine), Richard Weiss (with


Strong Opportunity) and Jean-Marie Eveillard (with

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SoGen International). Eveillard was replaced in October 1998 by Bob Sanborn (with

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Four of the managers -- Davis, Hawking, Segalas and Eveillard (now Sanborn) -- are responsible for 20% each of the portfolio. Two of the managers -- Weiss and Friess -- are responsible for 10% each. Each manager is limited to his best five to 15 stock picks.

The following chart showing the 1997 and 1998 performance of Masters Select Equity vs. the funds of the star managers tells an interesting story.

Some of the managers' own funds have done better than Masters Select. In 1997, Harbor and Davis did better; in 1998, Harbor and Strong outperformed Masters Select.

As an investor in Masters Select, you have no control over the hiring or firing of a manager. While Friess and Eveillard have stellar histories, they have underperformed since the fund started. We can only assume this underperformance was reflected in Masters Select, but you couldn't do anything about it. (Masters did replace Eveillard with Sanborn last October.)

An underlying assumption is that since you can't always pick the winners, it is important to allocate the money among different kinds of managers. While this may prevent stellar performance every year, it also may provide a cushion in down markets.

But while Masters Select may function as a core holding, I would rather pick my own managers. More importantly, I do not favor the concept of funds with multiple star managers. You have a better chance of picking and replacing managers as they meet or do not meet your criteria.

In January of this year, another fund with the star concept appeared on the horizon. Called the

Evergreen Masters

fund, it pools the efforts of Steve Leiber (founder of Evergreen), Mark Regan, of


, Charles Albers of


and Beth Cotner of


. So far this year, the fund is down 2.2%. Sound familiar? Famous names with infamous results.

While I would not suggest this concept is an investment fad, it is an alluring marketing concept with questionable results.

Vern Hayden is a certified financial planner with the American Planning Group in Westport, Conn. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. Hayden welcomes your feedback.