Bill Gross, Pimco Janus

Star Manager Or Team Approach To Investing?

in Financial Planning, Investing by

The departure of Bill Gross from the Pimco firm has caused a flurry of discussion about the importance of a star manager at the helm of a mutual fund.

For those older investors, we remember Peter Lynch and the Fidelity Magellan era. Lynch managed the Fidelity Magellan Fund from 1977 to 1990 and earned a 29% annualized average return.  After Lynch’s departure, the fund never returned to its former glory with unimpressive returns and declining assets under management.

Should You Invest With a Star Manager?

Bill Gross is the co-founder and former co-chief investment officer of Pacific Investment Management Company, LLC (Pimco). During the previous 15 years, Gross’ Pimco Total Return Fund was in the top 12% of its cohort group and the largest U.S. fixed income fund.

More recently, Pimco lost some luster as it sunk to more average returns. Along with Gross’ move to Janus, the fund is losing investment dollars, as shareholders flee. During the last year, its returns fell to the bottom 20% of its peer group and its total return pales lagging its largest index fund competitor, Vanguard Total Bond Market fund by 0.5%, as reported in a recent Money Magazine online article by Penelope Wang.

As if the falling returns weren’t enough, the Total Return ETF is under SEC investigation for artificially boosting the returns of the PIMCO Total Return ETF.

Gross’ exit has raised a couple investing questions:

Should You Run For the Exits When a Fund Manager Leaves? (I recently tackled this question in a U.S. News and World Report article.)

What are the advantages and disadvantages of investing with a superstar fund manager?

Investing with a star manager is great, while they are outperforming their peers. For a while, this can be a profitable strategy, until it isn’t.

Whether you should bail when a star fund manager leaves depends on the new manager’s background and record along with their strategy. In general, it’s not a great idea to chase returns.

It’s important to understand an inherent problem when investing with a superstar. Over time, as a fund manager continues to outperform, more investors flock to his or her fund. The assets under management grow and soon a manager is charged with attempting to maintain record beating performance with an enormous amount of capital.

While it’s never easy to be a top fund manager, it is extremely difficult if you are attempting to lead the pack with $292.9 billion (Pimco Total Return at its peak in April, 2013) of assets under management. Most investors fail to beat their benchmarks.

A Better Way to Invest Than Chasing a Star Fund Manager

The advent of tech-enabled, low fee investing opportunities can’t be overlooked. The press is awash with articles praising the new class of investment platforms. If you slash fees, improve after tax returns, and decrease risk, you’ve got an excellent chance of meeting your long term financial goals.

Investing with the best aspects of algorithmic asset selection, using low cost index exchange traded funds, carefully selected stocks, and unbiased advisors, is a way to invest which goes beyond the star fund manager.

How A Tech-Enabled Investing Platform Can Improve Your Investing Performance:

  1. One super performing fund is great, but we all know that diversification is crucial. So even if you hit a home run with one fund, what about the rest of your investment portfolio? To best manage your investments, it’s helpful to look at the big picture and develop a plan.
  1. Obtain broad diversification at a reasonable cost and you’ll usually boost your overall returns. A well-diversified portfolio (representing international as well as U.S. assets and asset classes) will guard against the pitfalls of a drop in one asset class. With smart diversification, when one asset drops, another weakly correlated asset class will likely rise to offset the decline.
  1. Technology assisted (with advice when you need it) investing platforms can help keep you disciplined and in line with your plan. The “tech-advantaged advisor” employs a built-in oversight when managing your money, so you don’t worry as much.
  1. Investing with a smart indexing approach is a well substantiated method to increase returns and lower risk. The new technology enhanced platforms make this very easy, and cut down on your personal portfolio management responsibilities.
  1. No one likes to pay taxes. Tax optimization investing is another benefit to the newer  investing platform. By improving asset location, it’s possible to substantially increase after tax returns.
  1. The scalability and low fee structure makes the auto investing option extremely attractive, when compared with traditional asset management approaches.

Personal Capital is widely recognized as one of the leading tech-enhanced advisor. As a Registered Investment Advisor, Personal Capital is legally required to put your interests first and not sell you over-priced products for commission.

If you like your active fund manager and are willing to pay the fees in hopes s/he outperforms, you have every right to continue. However, minimizing fees and going the team approach with the help of technology is probably the more sustainable way to go. Someone will always be looking out for you even if one person on the team leaves.

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Barbara Friedberg

Barbara Friedberg

Barbara Friedberg, MBA, MS is an investment portfolio manager, former university finance instructor, and website publisher at Barbara Friedberg Personal Finance.com. Her recent book, "How to Get Rich; Without Winning the Lottery", is available on Amazon. Barbara excels at teaching wealth building through investing. You can follow her on Twitter at @barbfriedberg

3 comments

  1. Peggy

    The idea is like be a fund of funds, where one’s skill is picking star fund managers vs. picking markets. with the implicit assumption that start managers will beat the markets.

    I see this derivative picking as very hard to accomplish. Just give me a team to run my money so that when inevitably one person moves on, I feel comfortable knowing another is there to help.

    Reply
  2. Barbara Friedberg

    @Peggy, It’s really difficult to consistently find a superstar manager. Using an integrated approach to investing has a greater likelihood of helping you meet your investing goals!

    Reply
  3. Callie Marie

    I have never heard about the difference between a star manager and a team approach to investing before. Either way, I think that I like the sound of “tech-enabled, low fee” opportunities the best! By starting with small amounts, you minimize risk, even if that means less of a profit. I’ll have to do more research on investments before I decide though.

    Reply

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