(PUB) Investing 2016

9

February 2016

Morningstar FundInvestor

Table 1 How the Largest Active Management Shops Determine Portfolio-Manager Bonuses

Time Periods (years) Evaluated to Determine Manager Bonuses

Active Mutual Fund AUM Bill ($) 1

Time Period Weighting Scheme 2

Avg Horizon (years) 3

Average Equity Fund Turnover (%) 4

Average Longest Manager Tenure (years)

Investment Firm

1 2 3 4 5 6 7 8 9 10

T. Rowe Price

447.3

• • •

•

Equal

4.75

44

7.1

Oakmark

79.2

• • •

•

Equal

4.75

34

17.1

American Funds

1,198.1

• • •

•

Progressive

 4.25

27

11.4

Fidelity

1,073.6

• •

Equal

4

91

6.0

JPMorgan

270.3

• • •

Progressive

 3

80

7.9

Janus

106.2

• • •

Progressive

 3

55

6.3

American Century

100.8

• • •

Progressive

 3

97

8.4

The Hartford (Wellington)

93.4

• • •

Progressive

 3

84

7.4

Oppenheimer

181.4

• • •

Progressive

 3

55

7.2

Invesco

138.6

• • •

Progressive

 3

41

7.0

Columbia

138.9

• • •

Progressive

 3

71

6.8

BlackRock

216.3

• • •

Equal

3

86

5.7

Franklin Templeton

409.7

• • •

Equal

3

33

14.6

MFS

178.4

• • •

Three-year emphasized

3

48

9.9

Lord Abbett

101.5

• • •

Equal

3

111

7.6

Goldman Sachs

90.5

• • •

Equal

3

90

7.6

Putnam

71.3

•

Equal

3

80

8.8

PIMCO

299.5

• • •

Dollar-weighted

2

—

3.4

Waddell & Reed (& Ivy)

82.5

• •

Equal

2

58

9.2 (5.9)

Dodge & Cox

183.4

—

—

15

21.7

Median 7.6 1 As of 11/30/2015. Excludes fund-of-fund and money market assets. 2 Equal means the firm places even weight on each measurement period; progressive means the firm places increasing weight on each succeeding measurement period. 3 Calculated as the average of time periods (in years) used to determine bonuses; if performance is more heavily weighted to the long term, the greater-than symbol (  ) is added before the average. 4 The average turnover of a firm’s equity funds during the past five years through 2014. Source: Morningstar. 0.20  3 58

circumstances. American Funds, Oakmark, and T. Rowe Price’s equity funds had below-average turnover during the past five years as compared with other firms in Table 1 . However, the relationship is weak in other instances. For example, Lord Abbett and Franklin Templeton use the same compensation structure, though the former had an average turnover of 111% versus 33% for the latter. It also would be reasonable to assume that including a longer assessment period leads to greater retention of managers, by encouraging skippers to stay put. That seems to be the case with Oakmark and American Funds, though T. Rowe Price’s average manager tenure ranks lower than most peers’ in Table 1 . PIMCO has the shortest average tenure of the bunch, but that owes largely to Bill Gross’ recent departure. K Contact Leo Acheson at leo.acheson@morningstar.com

An Outlier Dodge & Cox does not explicitly link bonuses to fund performance. It believes that tying compensation directly to returns might adversely promote competi- tion instead of constructive teamwork. Instead, the firm focuses on the caliber of investment ideas and industry insight. Morningstar generally favors a compensation structure that specifically links port- folio-manager pay to long-term fund results, but there is no reason to question Dodge & Cox’s focus on the long haul. Over the past five years, the firm’s equity funds had an average turnover of just 15% , and it has one of the highest manager-retention rates. Does Compensation Structure Influence Portfolio Turnover or Manager Tenure? One might expect firms that emphasize long-term returns to have funds with low portfolio turnover, and vice versa. That appears to be the case in some