The cult of the star manager is fading, with fund groups preferring the relative anonymity of a team approach to lessen the leverage any individual may have over the company.
Among US equity mutual funds, excluding index and sector-specific products, the proportion of strategies run by a sole manager has dropped from 71% in 1991 to 29% in 2015. In the same period, the share of funds managed by four or more people has increased almost sixfold from 4% to 23%.
However, through that sample period, the individuals outperformed the teams: the average sole-managed fund generated monthly alpha of 0.0759% on a five-factor basis, compared with 0.0613% from the team-run mandates.
Those numbers come from a study published in June by Anastassia Fedyk of Harvard University, Saurin Patel of the University of Western Ontario and Sergei Sarkissian of McGill University. Their interest was in the dynamics of portfolio management under one or multiple stewards.
Specifically, they wondered whether shifting from a single manager to a team would decrease any tendency towards overconfidence. As a proxy for this, they considered excess trading after a period of strong performance: following successes, did managers become emboldened to buy and sell more frequently?
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At the headline level, funds with a single manager traded significantly more often than teams: their average annual portfolio turnover was 86%, compared with 78% for teammanaged vehicles. The pattern held when adjusted for recent performance too.
For instance, teams in the top quartile by five-factor alpha went on to increase their trading by about 9% less than singlemanaged funds. Furthermore, there was a negative relationship between team size and turnover in team-managed funds after periods of good performance: two-member teams had a 7% reduction in trading relative to sole-managed funds, while funds with four or more managers posted a 12% reduction.
The academics also examined funds that changed their management structure during their review period: 233 moved from a single manager to a team process, while 162 dumped teams in favor of an individual head.
This indicated that funds switching from being single to team managed exhibited a 12% lower sensitivity of turnover to past performance than funds remaining single managed, while funds making the opposite transition from being team to single managed showed 6% more performance-induced trading than equivalents that stayed team run.
Fedyk, Patel and Sarkissian pondered several alternative theories for the excess trading of single managers. For example, other work has established that men are more prone to overconfidence than women, so could the greater likelihood of female involvement in a team-managed fund contribute to their lower turnover levels?
To address this point, the academics focused only on exclusively male management teams, but here too they still found a significant reduction in performance-induced trading. Teamwork mattered more than gender.
They also acknowledged that superior past performance could lead to higher flows into the fund, which would in turn force managers to trade more. They tackled this by testing the differential impact of net inflows and outflows on teams and performance-induced trading separately, but again this revealed no impact of fund flows on the relationship between teams and performance-induced trading.
Finally, the researchers wondered whether the higher trading levels after a successful period could be based on greater insight rather than mere overconfidence.
‘We observe that while single-managed funds trade more and therefore incur more costs after good returns, their next period performance is no better and is often worse than that of team-managed funds,’ they noted. ‘Therefore, we rule out the information-based trading and conclude that single-managed funds are more prone to overconfidence bias.’
The implications for fund buyers are less clear. It is hard to ignore that single managers tend to outperform teams. At the same time, teams seem to minimize individuals’ tendency to overtrade. Perhaps the lesson is to back soloists to chase returns and groups for more conservative management.