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  • Home>Research & Insights>Fund Times>The Cult of the Portfolio Manager

    The Cult of the Portfolio Manager

    An idea whose time has come--and gone.

    John Rekenthaler, 08/22/2017

    The Stars Arise
    The cult of the mutual fund portfolio manager began during the 1960s, to ill effect. "Performance managers" who owned the "glamor stocks" of "go-go companies" thrashed the major stock indexes, attracted large inflows and glowing press reports, and then smacked into a six-year wall. Happily, after encountering that wall, their funds would not pay capital gains taxes for many years to come. Unhappily, that was because those funds had realized massive net losses and there weren't many remaining shareholders to deplete their tax benefits.

    The cult behaved better upon its return, during the bull market of the 1980s. This next generation of mutual fund heroes, by and large, invested more soberly than its predecessors. Vanguard's John Neff was conservative by any standard, favoring the cheapest of blue chips. But even the growth-stock stars, such as Fidelity's Peter Lynch or Acorn's Ralph Wanger, knew how to survive bear markets. Unlike the go-go managers, the 1980s' breed of mutual fund superstar retained most shareholders during the downturns.

    With apologies to Jack Bogle, I can even be persuaded that the 1980s cult was a positive thing. Star managers attracted some investors who otherwise would not have purchased stock funds (back then, as opposed to now, famous managers inevitably held equities). Good timing, given that stocks rose almost uninterruptedly for two decades. For those who switched from holding stocks directly to receiving professional management, that decision worked out well, too. In most cases, the leading funds outperformed the portfolios of do-it-yourself stock investors.

    So, there wasn't much to dislike. To be sure, the publicity machine was distasteful, particularly to the portfolio managers themselves. (Rare is the skilled investment professional who enjoys giving a marketing spiel.) But the ends justified the means. Would mutual funds have attracted as many assets had the cult never developed? Perhaps. We can't know the answer to that counterfactual question, but we do know the benefits that accrued from what actually occurred.

    (Unlike with the 1960s, the major damage inflicted by mutual funds on shareholders during the 1980s came not from the personality-laden funds but from the faceless long government bond portfolios. Almost instantly upon their creation, such funds commanded billions of dollars, contributed by investors who were attracted to the funds' high yields and apparent government guarantees. Those shareholders quickly learned about interest-rate risk.)

    Unlike today, the biggest actively run stock funds of the 1980s and early 1990s often beat the S&P 500. The stock market was less efficient back then, because investment professionals accounted for a smaller percentage of the trades. Also, compliance regulations were less strict, thereby permitting portfolio managers to receive "guidance" from corporate managers that retail investors did not hear. Better training and better information--it would have been a surprise had the top professionals notexcelled.

    It's a New Day
    Then things changed, as professional investment managers gradually lost much of their competitive advantage. Although they still possess training that few can match, and the support of their research departments, fund managers now must compete against others who are similarly armed. Taking candy from the individual-investor baby was one task; removing it from the clutches of another professional manager is quite another. With corporate guidance being severely curtailed, it's difficult for even the brightest of fund managers to triumph routinely.

    In addition, the needs of the mutual fund shareholder have evolved.

    is vice president of research for Morningstar.