Study Examines Possible Link Between Fund Manager Tenure and Performance

by Caroline Maxwell, InvestorsOffshore.com

31 May 2001

Mutual fund managers are under scrutiny again, as a recent Morningstar.com survey revealed a possible connection between the length of the fund manager's tenure and the performance of the fund. The study, directed by Dan Culloton, the managing editor of Morningstar's News and Markets Team, suggested that managers who have been on the job for longer tend to have funds that perform better than those with newer skippers.

The study looked at funds with at least $100 million in assets for the period from March 2000 to March 2001, and found that while managers whose tenure was very much above average (20 or more years of experience managing the fund) were up approximately 4.54% last year, and managers with between 10 and 20 years of experience were up 4.07% on average, fund managers with the average tenure of 3.6 years were only up 0.63% in 2000, and those with below average tenure lost 1.36% during that period.

There have been concerns that the study was not entirely fair, in that 2000 was a particularly bad year for…well, pretty much everyone, and some feel that had the study been conducted in 1999, at the height of the tech boom, the picture would have been substantially different. However, a possible conclusion that can be drawn from this is that a longer tenured fund manager might have seen the bear market hot on the heels of 1999, and taken precautionary measures.

Morningstar were quick to point out that they are not trying to characterise newbie fund managers as ''bumbling neophytes", and agreed that the majority of new fund managers have a great deal of experience as managers and analysts under their belts before they take charge of a fund. Mr Culloton simply believes than relatively inexperienced fund managers, such as the below-average tenured managers at Fidelity Investments (two dozen of whom trailed their peers during the period under examination), fell foul of their love of growth stocks. Conversely, a resurgence in value funds during that 12 month period helped experienced managers, who tend to lean toward the value end of the spectrum anyway, to look good in the study.

So what are investors to make of all this? As Dan Culloton admits: 'I'm not sure how many investors even look at manager tenure as a factor.' However, if all else is equal, he suggests, it might be as good a tiebreaker as any…

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