Media Heat Puts Fund Managers In the Hot Seat
Performance is key, as Vinik case shows
Jeffrey Vinik's dramatic decision to step down as manager of Fidelity Investment's Magellan Fund is a stark reminder of the perils of being a mutual-fund manager in an age when top performers get movie-star-like coverage in the media.
It is also a reminder that "it is very hard to beat the [stock] market over time," says Ravi Shukla, a professor of finance at Syracuse University in Syracuse, N.Y. That lesson applies, Mr. Shukla says, whether you are an individual investor, or the high-priced portfolio manager of the largest single mutual fund in the world, as is Magellan, which has $56 billion in assets.
A fund manager "has to show good performance to survive in this business," Shukla says. "Managers may be feeling more pressure now," because of media exposure and because fund-tracking services now judge more on short-term performance, such as over a single year. A decade or so ago, the standard tended to be performance over longer periods.
Fund managers have been pushed out at a number of funds in recent years, although whether the actual turnover rate is greater now than in the past is an issue that academics have not yet determined, Shukla says. But poor performance at a fund can lead to removal or resignation, he says.
Little wonder then, that many portfolio managers work to maintain a sense of quiet equilibrium, while avoiding the type of media glare that Mr. Vinik acquired, whether he sought it out deliberately or inherited it. Vinik was the second manager to follow Magellan's superstar manager Peter Lynch. Mr. Lynch racked up blazing returns for Magellan from 1977 to 1990. He was followed by Morris Smith from mid-1990 to mid-1992, when Vinik took over.
"When I go home at night, I read books and talk to my family," says portfolio manager Dan Charleston, who heads the top-rated Seligman High-Yield Bond Fund, in New York. "On weekends, I play golf and coach the kids' soccer team. I tend not to think about work when I go home. And besides, you can't trade [bonds] on weekends."
Now in his ninth year at Seligman, where he is a managing director, Mr. Charleston says he tries "not to get caught up in all the noise" that inevitably surrounds a manager - whether it's praise, criticism, or just plain advice from friends and associates.
Phil Tasho, chief investment officer for Riggs Investment Management Company, which runs the RIMCO Monument family of mutual funds in Washington, finds it imperative to "stay focused. It is very easy to lose your direction."
Most important, he says: "you just can't believe your press," whether you are being told you are doing a good job or a bad job.
Mr. Tasho delegates as many administrative duties as he can to others, while keeping his eye on his portfolios.
HANS STOLL, who heads the Financial Markets Research Center at Vanderbilt University in Nashville, believes that in glorifying top fund managers like Peter Lynch, the media may have unwittingly turned attention away from academic studies showing that markets operate under internal conditions of their own, and that transcending those conditions is very difficult.
Even the Vinik resignation story, which was noted on television and turned up on the front page of several newspapers, may be somewhat misleading, he says.
"What is surprising is not that Mr. Vinik, or the Magellan Fund, may have stumbled, but that the stumbling didn't occur earlier," given the fund's enormous success over the years, Mr. Stoll says.
After years of generally beating the market, Magellan underperformed the Standard & Poor's 500 stock index for the three-year period ending April 1996.
Shukla, along with academician Charles Trzcinka, studied the performance of 1,387 mutual funds and 243 investment advisers over the period 1978 to 1989. His conclusion: There is no evidence that a mutual fund, or fund manager, can consistently outperform risk-adjusted market benchmarks, he says.
For fund managers seeking to ensure top performance to hang onto their jobs, that may not be happy news.