Mutual Funds: 'Star' manager a thing of the past

It was front-page news in 1990 when the legendary Peter Lynch announced that he was leaving the Fidelity Magellan fund, and not just in places like Boston - home of Fidelity - or major money centers, but in communities like Allentown, Pa., where I was business editor of The Morning Call newspaper.

Lynch had become such a household name that there was discussion at the paper over whether he deserved Page One. I didn't think his departure warranted that status.

I remember the discussion this way:

Me: "If this was any fund but Magellan and any manager in the world except for Peter Lynch …"

Boss: "No one would care and it probably wouldn't even make the business page."

Earlier this month, Fidelity changed managers at Magellan again.

This time, it didn't even make the business page.

Sure, Magellan (FMAGX) has gone from being the world's largest fund to the ninth-largest fund at Fidelity. Today, it has just $17 billion and carries a one-star rating from Morningstar Inc.; the kindest thing Fidelity could do for shareholders is to fold it into something good, rather than passing it to Jeff Feingold, manager at Fidelity Trend (FTRNX).

The bigger point is that virtually no manager's departure today would make headlines. Yes, PIMCO's Bill Gross will make news someday when he calls it quits, and a few others will cause a stir or a buzz, but the heyday of the "star manager" appears over.

"At exactly the market moment when star managers should matter most, they've vanished quicker than a tax dollar in Washington," said Jim Lowell, editor of the Fidelity Investor newsletter. "While there are many managers whose track records are stellar, the days of building industry behemoths on the backs of one star have dwindled to a flickering flame."

Few managers have the skill or timing of Lynch, who not only grew Magellan by a cumulative 2,700 percent during 13 years at the helm, but had the foresight to step down - and etch his record in stone - in his mid-40s. By comparison, Bill Miller made his legend at Legg Mason Value Trust (LMVTX) by beating the Standard & Poor's 500 for 15 consecutive calendar years; alas, Miller has been crushed by the market since the streak ended in 2006. Likewise, Bruce Berkowitz polished his star at Fairholme Fund (FAIRX), until recent underperformance tarnished it.

Industry observers can name a dozen or more guys who still qualify as "stars," but the average fund investor probably couldn't name the person in charge of running half of their funds.

"Hugely outsized performance and media attention over several years gets to the affected managers' heads," said Mark Salzinger, editor of the No-Load Fund Investor newsletter.

"They begin to believe their press clippings and think they are infallible. This leads them to hold on to losing stocks and out-of-favor mindsets forever; they have trouble adapting to the market's new realities. … The result can be very ugly performance, and great disappointment for investors who bought in at the tail end of the period of the manager's above-average performance."

Legends like Lynch or John Neff, longtime manager of Vanguard Windsor (VWINX), were made in an era before there were stars, specifically the symbols of Morningstar Inc.'s rating system. Morningstar introduced its rating system in 1991; by 2004, three-quarters of all new investments were flowing into funds with four- or five-star ratings.

Stars were born in that era - from the zenith of Lynch's career at Magellan until ratings became a driving force in the industry - as funds became Main Street's investment of choice; hot managers regularly graced magazine covers and were lionized by a business media that confused a bull market for brilliance.

When the Internet bubble burst, and Morningstar style boxes showed that go-anywhere managers had changed tactics, the shine was gone. Lynch made a move into bonds during his time at Magellan, but it caused no uproar; his timing was early but ultimately the call proved good. Jeff Vinik, the second man to succeed Lynch at Magellan, made the same call in the mid-1990s - and was pilloried for it.

"It is clear that star managers are a thing of the past, although there are still a few hanging on," said Geoff Bobroff, an industry consultant from East Greenwich, R.I.

"I would suggest that a manager really can't run money like Peter did before Morningstar; Morningstar really puts a straitjacket on managers to stay in a still box. Thus, today you can't buy a fund and expect that the manager will go anywhere to make money."

Today, investors either want to control the process - either through use of index funds and an asset allocation plan or through funds where the manager follows a specific mandate - or they want one-size-fits-all portfolios. Instead of letting a fund manager navigate the market, they're picking an asset-allocation plan and glide path for a lifetime, worrying less about finding a star than reaching their goals.

No one needs a "star manager" to reach his or her goal. For people who wish they had one - who want a name they trust at the top - the stars of the future will be managers who deliver to investor expectations, rather than the ones who, like Lynch, can show numbers beyond investors' wildest dreams.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, Mass., 02025-0070.