A Mixed Picture at American Century

• By Gregg Wolper
• On 7:00 am EDT, Tuesday September 22, 2009

As part of our ongoing efforts to investigate the deeper traits and actions of fund companies, going well beyond their funds' performance or the firms' latest inflows and outflows, in recent months we have published columns providing new reviews of the stewardship practices of Diamond Hill and AllianceBernstein. Today we take a look at the stewardship of a large firm familiar to most readers: American Century.

American Century has a long history, and much of that history remains influential at the firm today. However, the firm has made critical changes at the top levels of management in the past few years, and it has had other changes as well. So, after a brief review of its history, we'll focus solely on the current situation at the firm, for that is what matters now.

The Background
American Century was founded in 1958 by Jim Stowers Jr. His son, Jim Stowers III, was chairman of the firm for many years. It has three main centers for its investment personnel: Kansas City, Mo., for most of the domestic-equity managers and analysts; New York, where the international team resides; and Mountain View, Calif., where the fixed-income and quantitative investors are located.

In the 1990s, the firm--then called Twentieth Century--was best known for its momentum-growth funds, which rode the huge technology-fueled rally to stellar gains, attracting a ton of assets in the process. It still has those growth funds, although they've gone through several manager changes and have made adjustments in their models since the halcyon days of the late 1990s. But American Century also offers value funds--some with very strong records--as well as bond funds, international-equity offerings, quant funds, and target-date and asset-allocation vehicles. In terms of investment performance, it would be tough to stick a label on the overall lineup that would provide any meaningful guidance. There are many good funds to be found, many that have little appeal, and some in between. That variation is not surprising, given the number of areas, and the amount of funds in each area, that the firm offers.

On the Bright Side
To its credit, American Century was not in any way associated with the mutual fund scandals that first surfaced in 2003, and no ethical questions have arisen since then, either.

Also admirable is that a high percentage of the compensation awarded to American Century personnel outside the investment area--such as marketing--is tied to the investment performance of the firm's mutual funds. That helps address the conflict of interest that exists at many firms, where marketing and sales personnel have an incentive to promote the sales (and sometimes even influence the creation) of funds in hot, narrowly defined sectors. Such funds can easily attract assets, but they tend to disappoint shareholders eventually when that sector, or type of investing, cools or collapses.

In the past few years, American Century has increased the amount of communications sent to shareholders and advisors. American Century now provides regular updates from its seven chief investment officers. (Besides overall CIO Enrique Chang, who came from Munder Capital Management, there are CIOs for specific areas such as fixed income and value.) The firm also provides more-descriptive letters in the funds' annual and semiannual reports, and quarterly commentaries, among other things. However, the manager letters in the quarterly communications and semiannual and annual reports still don't match the detail and personal feel of the industry's best, such as those from Longleaf Partners, Third Avenue, and Oak Value.

American Century takes other shareholder-friendly measures, such as using advanced techniques to keep down trading costs that could harm returns given the high-turnover approach of the growth funds in particular.

Some Important Concerns
But for several reasons, American Century lands in the average range when it comes to corporate culture, rather than above average. One concern is the turnover in the upper ranks. Current CEO Jonathan Thomas, who joined American Century in 2005, took the CEO position in 2007. Overall CIO Enrique Chang, who arrived at the firm in 2006, also took his current post in 2007. Both Thomas and Chang are still in place. But two important 2007 hires--the CIOs for growth investing and for international investing--were both gone by the time summer 2009 rolled around. The growth CIO lasted only a year and a half, in fact. Both were hired by Chang, so these aren't cases of a new regime simply easing out holdovers from a prior administration.

A number of portfolio managers who were not CIOs also have departed in just the past couple of years, including Scott Moore, a longtime value manager, and Federico Laffan, who had been running international small-cap portfolios for years. In mid-2009 came the retirement of Jeff Tyler, who had been in charge of the asset-allocation area for more than a decade. Although a big fund shop is bound to have manager turnover, the number of high-profile departures--which includes growth manager Tom Telford, who was brought in during 2006 to run well-known funds but was gone by the end of 2008--don't instill confidence.

The size of the fund lineup, and the way American Century manages it, also can lead to confusion. For example, the firm offers four different U.S. large-value funds and four other funds tackling domestic large-growth stocks, with slight-to-substantial differences that can be difficult to discern. Some instances are especially confusing. Small-cap funds New Opportunities (NASDAQ:TWNOX - News) and New Opportunities II (NASDAQ:ANOAX - News) used to have different strategies and managers; now they have the same manager team and the same strategy. The well-known growth vehicles Ultra (NASDAQ:TWCUX - News) and Select (NASDAQ:TWCIX - News) formerly had distinct manager teams; now the same duo runs both funds--but with a slightly different strategy for each. Conversely, Heritage (NASDAQ:TWHIX - News) and Giftrust (NASDAQ:TWGTX - News) once had identical portfolios and strategies; that's no longer true. Good luck to investors trying to keep track of all this and determine exactly which fund, if any, is currently the appropriate choice for their situation.

Another issue is the manager-compensation structure. Some factors are positive. American Century recently revised its system of bonuses for investment personnel to place more emphasis on longer-term (three- and five-year) performance versus one-year performance. Previously, the formula placed excessive weight on one-year performance and little to nothing on any period greater than three years. That system hardly encouraged a long-term outlook from the managers and analysts. So the revision is a step in the right direction. However, the new approach still has 25% of a manager's annual bonus reliant on one-year performance. Therefore, managers still have a significant incentive to focus on that extremely short time period along with their longer-range thinking.

Conclusion
Costs are often a critical part of a fund family's culture score. Here, though, the fund shop's expense ratios, when viewed over all the different areas the fund covers, do not stand out as being notably low or notably high. So this factor does not push the judgment strongly one way or the other.

Finally, it should be noted that American Century gives a substantial amount of corporate money to medical research, a tradition originated by its founder. While that is undeniably admirable, it does not enter into our corporate-culture evaluation or Stewardship Grade. Those judgments are based on the actions and attitudes of a firm that relate mainly to investment management.

All told, American Century scores in the average range when compared with other fund firms' corporate cultures. In letter-grade terms, therefore, it gets a C.

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