(PUB) Investing 2015

Morningstar FundInvestor

9

July 2015

only about a fourth of firms showing a retention rate below 90% . Firms in this lower set of retention rates often have made large-scale changes, with teams of managers coming and going. Such instability can be cause for concern, especially if a firm is in the early stages of rebuilding. The industry data show a positive relationship between higher five-year manager-retention rates and better success rates and risk-adjusted success rates: Firms in the industry’s worst grouping (retention below 90% ) had significantly weaker 10 -year success rates, suggesting that poor performance may have spurred manager turnover and thus a lower retention rate. Overall, investors have good reason to hold firms with better manager-retention rates in higher regard when deciding with which fund companies to invest for the long term. Dodge & Cox : 96.7% Manager-Retention Rate Among the 20 largest investment-management firms by open-end mutual fund assets, Dodge & Cox reports the best five-year manager-retention rate. During the past five years, it has retained nearly 97% of its portfolio managers in a fund-management capacity. There are a couple of drivers here. One, Dodge & Cox supports an investment-centric culture that’s conducive to long careers in portfolio management. Note that even those with executive- management duties, such as chairman Charles Pohl and CEO Dana Emery, continue to run portfolios; that’s a long-standing tradition at the firm. Two, the firm offers almost every investment professional who has been with the firm for several years the opportunity to become a partner and buy shares in the company; these partners buy shares at book value, and if they leave or reach a certain age, they must sell the shares back at the then-current book value. This investment can represent a significant portion of an individual’s wealth, encouraging loyalty to the firm. Finally, Dodge & Cox’s ingrained team- based approach means that large investment policy committees run each of the firm’s six mutual funds. Those teams range from six portfolio managers to 17 .

Franklin Templeton : 95.8%Manager-Retention Rate Franklin Templeton became the firm it is today largely by acquisitions, although most of those occurred some time ago. When the firm purchased its two largest targets, Templeton and Mutual Series, it promised to allow those firms to maintain their own distinct cultures and focus on investing, while taking some administrative and distribution tasks off their hands. In large part, the company has delivered on that promise. That kind of autonomy can make it easier for each underlying boutique to keep its investors. T. Rowe Price : 94.4% Manager-Retention Rate T. Rowe Price’s manager-retention rate is quite high, reflecting the fact that portfolio managers tend to spend their entire careers at the firm. T. Rowe has done a nice job of nurturing a culture that allows its managers to focus on investing, and they can be named on the same fund for a very long time. But we’ve recently seen a few unexpected departures and the announcement of several retirements. The good news is that when someone is retiring from T. Rowe, there tends to be an uncommonly long tran- sition time to a new manager, so shareholders remain in good hands. But considering that many T. Rowe retirements happen when managers are in their early to mid- 60 s, there’s potentially a genera- tional shift coming down the pike. Janus : 93.1% Manager-Retention Rate Janus’ manager retention has improved. We’ve been critical of managers jumping ship to other shops or into early retirement, seemingly in spurts, and in fact, that’s a primary reason we had graded Janus’ Corporate Culture as a D. But a 93% manager- retention rate isn’t too shabby, though still not stand- out. The main problems had been within Janus’ equity group in Denver, as those funds had experi- enced spurty performance and shareholder redemptions. Janus recently hired Enrique Chang as the equity CIO ; he made some immediate changes to the research group. K Contact Bridget B. Hughes at bridget.hughes@morningstar.com