Bill Gross shook the investment world with his announcement in September that he was departing the firm he founded, PIMCO, to join a competitor, Janus Capital. This is like Walt Disney leaving Disney to join Warner Brothers.
Bill was a rock star of bond management for decades, exhibiting stellar performance, a quirky personality, and the ability to grow assets to eventually manage the world’s largest mutual fund ever. But Bill’s ascent, and now potential fall, brings about the question of whether or not star mutual fund managers are a thing of the past.
To be sure, there have been others beyond Bill, that have blazed the trail into investment stardom. Think of Peter Lynch, Bill Miller, and even Warren Buffett, to name a few. But it appears this is becoming less of the mentality as the mutual fund, and investment world in general, evolves.
Let’s look at the top 10 mutual fund complexes with the most assets according to Morningstar:
Thinking through that list, can you name any one of their investment managers off the top of your head? Maybe one or two come to mind, but the message seems to be clear. Building assets these days, and making good investments, seems to be less star driven.
Why is that? Take Vanguard for instance. They are the largest fund manager, and their largest mutual fund is the Vanguard Total Stock Market. Yes, that fund needs a manager, but that fund is an index fund. The manager and research team aren’t picking and choosing stocks, they are optimizing buys and sells in order to track an index as closely as possible. You don’t need a star for that.
The same goes for more quantitative, or rules-based, strategies. These have screens built in as to how investments are chosen, but beyond that, manager discretion is often thrown out the window. Talent may be needed to structure the initial screen, but once up and running, the need for a star manager subsides.
Lastly is the tale of the active manager – the one picking and choosing investments based upon multiple factors including in-house research, discussions with companies, and other screening mechanisms. Even this practice is showing an evolution away from a star manager. Take PIMCO for instance with their largest fund, PIMCO Total Return. Bill was the star, but now that Bill has left, management of the fund has been taken over by not one, but three different managers with different responsibilities and skills. This is something Pimco and others have been doing on other funds for years. Now with the star manager gone, the way forward is by committee, not individual.
Stars are fun to watch, but in our opinion, you don’t want to invest assets based upon one person’s opinion about how things will go. Taking a diversified approach to management, capturing returns that are out there not because you outsmart the market, but because you smartly allocate to the market, makes far more sense than searching for the next star.