FORTUNE Investor/Special Mutual Funds Report
Wanted: Fund Manager (No Experience Necessary) More and more these days, mutual fund companies are putting hot Young Turks at the helms of their new, aggressive portfolios. The question is, Should mature investors be wary?
Margaret Boitano
03/20/2000
Fortune Magazine
Time Inc.
Page 260+
(Copyright 2000)
At 29, Erin Sullivan reached the pinnacle of her money management career at Fidelity Investments. In 2 1/2 short years she had steered Fidelity Aggressive Growth to triple-digit returns and boosted assets to over $17 billion, then abruptly quit last month to start her own hedge fund. Down the hall from Sullivan 's former office at Fido's Boston headquarters sits Steven Calhoun, just a year younger, who was handed the keys of Fidelity Select Retailing six months ago (after a five-year stint as an analyst), and has managed to lose money ever since.
You can't put all the blame on Calhoun--picking profitable stocks out of the battered retail sector isn't nearly as easy as it was in Sullivan 's large-cap playground. But the comparison isn't an idle one- -Fidelity, the nation's largest fund company, with $860 billion in assets, takes pride in the youthfulness of its managers. The company has even made a habit, it seems, of grooming twentysomething analysts on small sector funds, then giving them their own multibillion- dollar diversified funds to run.
The question this raises--and it's apparently a provocative one, based on the responses we got from fund companies--is, Does experience matter? We don't mean just any investment experience, such as the ability to undress a company's financials as a clever analyst. We mean the kind of hands-on training one gets working for a few years with a more senior fund manager. In-the-mud experience. War- story experience. (Those following the presidential primaries may find this question familiar.)
Indeed, the answer, at first blush, is equally provocative. Experience may not matter much at all. More than 100 U.S. stock funds returned over 100% last year, according to fund researcher Lipper Inc. Fifteen even produced 200%-plus gains, and of those 15, the average manager tenure was a short 2.7 years. How did the young skippers of these new wonderfunds pull it off? Mostly by copping rides on tech-stock comets like Qualcomm and i2 Technologies. In today's Alice-in-Wonderland market, it would appear that the less you know, the better.
Frank "Quint" Slattery, the 27-year-old manager of PBHG New Opportunities, is the hottest new kid on the block. After spending a year analyzing tech stocks for Gary Pilgrim, co-founder of Pilgrim Baxter & Associates, Slattery was given a new toy to play with. Quint had won kudos for introducing Pilgrim to Network Solutions in April 1998, when it fetched around $15 a share, split-adjusted; today the stock is trading at $322. Slattery achieved more of the same at PBHG New Opportunities, scoring an eye-popping 609% gain in his first full year. The fund attracted so much money that it closed to new investors in November.
Mike Lu is another rookie sensation. When Janus gave the 30-year- old tech analyst his first fund last year, who would've thought he'd put Janus' accomplished veterans to shame? Janus Global Technology surged a stunning 212% in 1999. Then again, Lu had been analyzing technology stocks for seven years at Janus before it made him a portfolio manager.
The most famous of the young guns, of course, is Ryan Jacob, who helped turn the $200,000 Internet Fund in December 1997 into the nearly $1.2 billion gorilla that it is today. At the ripe old age of 29, Jacob was in first place among all U.S. stock funds that Lipper tracked in 1998 (up 196%). Today, he's 30 and running his own fund company.
Jacob even started a new trend in the industry in which shining stars cash in on their strong--albeit short--track records to start new funds. Wiesenberger/Thomson Financial counts 14 Internet funds today, up from just three in 1998. And there are a dozen more in the pipeline, waiting for the green light from the Securities and Exchange Commission. The average tenure of a Net fund manager is a mere year, compared with four years for the average U.S. stock fund manager, says Chicago fund-tracker Morningstar.
They're simply following the money. Tech and Internet funds grabbed $32.9 billion in net new cash last year--the biggest booty among all sector funds according to Boston consultant Financial Research Corp. Money started pouring into Jacob's new outfit from day one. Since he opened the doors Dec. 13, he's grabbed $270 million in new assets. "There was a lot of anticipation when we first launched the fund," Jacob says. "The fact that I'm young and the performance that I generated gave us the credibility that we enjoy today."
There's that strange formula again: Young equals...er, credibility. But does the theorem really hold up? Well, not at Fidelity. There, managers with three or more years' experience on funds delivered an average total return of 8.8% last year, compared with the 5.9% total return for those with less than three years under their belts, according to Jim Lowell, editor of the newsletter Fidelity Investor. The gulf widens considerably if you take out the company's "value oriented" funds, which haven't fared well in today's rah-rah growth market. Seasoned managers delivered a 14.1% total return, vs. 6.2% for their rookie counterparts. So who's the best stock picker of the bunch? Fidelity's second-oldest manager, Neal Miller. At the helm of Fidelity New Millennium, Miller has an average five-year total return of 17.2%. "Long-term experience matters much more than bragging rights for one year," contends Lowell.
And a close look at the numbers reveals just how fleeting such bragging rights can be. FRC examined how top-decile funds perform just one year after they've skyrocketed. The results are sobering. A given year's winners fall, on average, to the middle of the pack the following year. In the third quarter of 1998, for example, the 68 funds in the top 10% fell to the 64th percentile in 1999. And on a mountain of 5,000-plus U.S. equity funds, that's a big slide. Consider this: Last year the top 40 funds returned more than 200% on average. That's ten times more than the 20% average gain for funds in the middle of the pack. Talk about trading in your Porsche for a Chevy.
The FRC study uncovered another factor that seems to work in favor of young fund managers--but again, only for a short while. Typically, they start out managing small funds that have outperformed their larger brethren across the fund-category board over the past decade. Why? Because the smaller you are, the easier it is to jump in and out of individual stocks without inadvertently driving up share prices. This new-fund effect wears off pretty quickly, though--especially if a hot young manager is swamped with new cash after a strong year. Watch out, boys.
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The New Top Ten FORTUNE asked the 20 top-performing domestic equity funds of 1999 to name their ten biggest current stock holdings. (We then weighted the picks by their respective prominence in each fund.) So which dot-coms, you might ask, are now on the hot list? Just one, it seems: OnHealth, acquired by WebMD/Healtheon this year. (Is it time to worry yet, Mr. Bezos?)
1. Cisco
2. Ariba
3. AOL
4. Nokia
5. Sapient
6. Qualcomm
7. Microsoft
8. OnHealth
9. CMGI
10. JDS Uniphase
Still no word on the hedge fund.
Jack |
