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The Problem with Fund Management Teams

Imagine if a Hang Seng Index company declined to name the individuals responsible for running the company; why should funds get away with it?

Christopher J. Traulsen, CFA 04 April, 2014 | 9:45
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Actually, there isn’t a problem per se. A team-managed approach can make every bit as much sense for a fund, or more, as a one- or two-manager setup. Indeed, some of our research analysts’ favourite funds, including many of the Aberdeen offerings, are managed by sizable teams.

The issue occurs when funds decline to identify in documentation accessible to investors the individuals who compose the teams (which is, sadly, all too frequent). In these cases, "Management Team" gives the fund a sheen of disclosure without anything backing it up. The team might include one manager or forty three (or 100 for that matter); it might have had no turnover in the last 10 years, or all of the managers might have departed and been replaced within the last six months. Manager tenure, stability and the relevance of experience therefore become impossible to measure meaningfully. In short, investors receive little or no information on key variables that are likely to affect their investment decision.

If it is not yet clear, we don’t think this is in the best interest of current or prospective fund holders. Indeed, we believe manager disclosure is extremely important. So much so that Morningstar fought long ago on behalf of fund holders to make such disclosure a requirement in the US. This requirement has now been in place in that market since 1993, and was amended in 2004 to include the condition that the names of each management team member be disclosed, along with salient information about their level of investment in the funds they run, other funds managed and the structure of their incentive pay.

The basic premise is clear: We think investors, regardless of which market they sit in, have a right and a need to know who is running their money if they are to make informed choices. Regulators demand such disclosure for management of listed companies (imagine if HSBC said it was "team managed" and declined to name the individuals responsible for running the company!). However, for reasons that slightly befuddle me--though I expect they reflect in part regulatory competition to grow assets domiciled in a given market and a lack of clout among small investors--regulators too often do not require the same of funds, as we noted in our Global Fund Investor Experience Report released in 2013. We think regulators could go further in requiring disclosure of managers' investments in the funds they run and incentive structures, but just having manager names and start dates would be a good start.

In the absence of any such requirement, we’re taking steps to improve the situation. We have long collected portfolio manager names and made this freely available on our Morningstar web sites (see the example of Aberdeen Global – Emerging Markets Equity Fund) and in other products, but a subset of funds has simply stated they are team managed without providing names of team members. As a first initiative, Morningstar is working with those fund providers who cite a team approach instead of listing individual managers to gather the names and start dates of everyone on a given fund's management team. For those that don’t supply the information, we plan to flag the manager as "Not Disclosed" since this is the actual situation faced by investors. Manager tenures will also be adjusted to reflect the lack of available information--if we cannot determine an accurate longest or average tenure based on team members' start dates, for example, we will make this clear. To the extent that manager tenure is a relevant selection criterion for investors, this should help them focus their efforts on reliable information.

This Morningstar article first appeared on FTAdviser

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About Author

Christopher J. Traulsen, CFA  Christopher J. Traulsen, CFA, is director of fund research, Europe and Asia, Morningstar.

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