Almost as soon as “bond king” Bill Gross fled the $2 trillion Pimco empire and sought exile at a firm one-tenth the size, the commentariat converged on the same theme: This signals the welcome demise of the star fund manager phenomenon.
Hours after Gross shocked the Street with the news he was heading to run an infant bond fund at Janus Capital Group (JNS), Bloomberg held forth on “Bill Gross and the Dying Breed of Mutual Fund Superstars.” The New York Times’ Upshot blog sought to punctuate an era by connecting “Bill Gross, Calpers and the End of the Investment Guru.” Reuters followed by suggesting, “As PIMCO bleeds assets, Gross shows risk of star culture.”
So is Bill Gross the last of a once-thriving, anachronistic breed – the star fund manager, who draws assets and media attention as the embodiment of a firm and expounder of an encompassing economic worldview?
Not so fast, maybe.
The same week we’re talking ourselves into the post-star era, Bill Ackman – of the piercing blue eyes and showman’s instincts for public backing of his investment positions – raised more than $3 billion for a new fund through an Amsterdam listing. This was more than the activist investor sought, and came amid ongoing public crusades against Herbalife Ltd. (HLF), Allergan Inc. (AGN) and the U.S. government backers of Fannie Mae (FNMA). But he’s not a star?
Then Wednesday, the don of activist mavericks, Carl Icahn, was lauded for his powers of persuasion after eBay Inc. (EBAY) moved to spin off its PayPal unit, just as Icahn suggested months ago. Never mind that a spinoff has long appeared an eventuality; the storyline was “Star activist Icahn wins another one.”
That same morning, David Tepper – founder of the $20 billion Appaloosa Management and a signature interlocutor of this bull market – appeared on Bloomberg TV. Expressing views on junk bonds, stocks and – yes – Bill Gross’s Pimco exit, he got the star treatment, and his observations afforded headlines as news in their own right, spurring hundreds of Twitter (TWTR) remarks.
Star power is not mutual
So there are still stars in money management, just of a different sort. They run hedge funds and take bold, concentrated bets while asserting their opinions freely and sometimes twisting arms to wrench returns from public companies and the investing crowd. They’re no longer steering public mutual funds, trying to outmaneuver a broad benchmark by tilting this way and that.
The real decline is in the traditional mutual-fund business, which has been attacked both by low-cost, transparent index exchange-traded funds and by exclusive, opaque, high-fee hedge funds able to act flexibly in protecting and enlarging pools of capital.
When mutual fund managers were household names, they were thought to have all the investing answers – or at least they could make the markets seem interesting. General disaffection with stocks, a broader recognition that beating the market is impossible for the majority of managers and the spread of easy alternatives such as ETFs have dimmed that appeal.
The Wall Street Journal recently noted that, since the start of 2013, investors have sent $513 billion into “passive” index-tracking stock and bond vehicles, versus only $127 billion into actively managed funds – despite the fact that the marketing budgets and broker promotion of active managers dwarfs that of passive fund providers.
Yet again this year, a large majority of active stock funds are trailing their benchmarks, despite there being more variation in stock and sector performance compared to last year. Active mutual funds, in this context, seem to many investors to combine weak performance and higher fees with being boring.
These days, publicly traded hedge fund stocks show the relative enthusiasm for “alternative asset managers” versus traditional mutual funds. Industry giant Blackrock Inc. (BLK), with more than $4 trillion under supervision, has a market value of 1.3% of assets under management, versus 6% for its ancestor alternative manager Blackstone Group (BX).
The day before Gross jumped to Janus and lifted its shares 40%, Janus traded for 1.1% of managed assets. Yet Oaktree Capital (OAK) run by Howard Marks – a quiet but revered star of private equity and hedge funds – fetches 8.5%.
Much of this has to do with the heavy fees hedge funds and buyout firms levy on their client assets, but it also reflects scant enthusiasm for the brand value of even dominant plain-vanilla fund companies. Smaller shops run by onetime-star owner-operators – such as Calamos Asset Management Inc. (CLMS) and Pzena Investment Management (PZN) – wallow with market values of less than 1% of managed assets, due in part to steady withdrawals of client cash.
The Magellan precedent
The idea that “the era of star managers is over” is not new. In the ‘90s, an ebullient bull market, the rush of baby boomers into investing and an expanding financial media complex created a rotating collection of celebrity managers who wowed crowds at the annual Morningstar conference.
Yet when one of that era’s shiniest stars – Jeff Vinik of Fidelity Magellan – fell badly behind a ripping strong market by building a heavy bond position in the mid-‘90s, he left what was then perhaps the most coveted job in asset management. Wall Street was stunned, rivals rejoiced and media scolds tut-tutted that the humbling of Jeff Vinik exemplified the danger of trusting those stars.
Vinik’s departure from Magellan in 1996 (in favor of an ultimately pretty successful hedge-fund career) marked the end not of stars but of a freewheeling mode of mutual-fund management that allowed the manager to make market-timing moves by raising lots of cash or shifting to bonds when nervous about equities. The industry has since forced most mutual funds into tight “style boxes,” pressing managers to stay fully invested in the stocks or bonds of their assigned flavor.
Magellan, incidentally, had $50 billion in assets under management when Vinik left, which ballooned to $100 billion by 2000 as the bull market went vertical. It has since bled down to $17 billion.
Certainly Bill Miller of Legg Mason remained a star (eventually a shooting star, then a revived one) long after Vinik stepped away. And other longtime performers such as Bill Nygren of Oakmark funds and Mark Mobius of Templeton funds retain certain franchise renown.
But on the whole, when it comes to mutual funds, even top managers might feel like Norma Desmond, who insisted that, even if they are still big stars, “it’s the pictures that got small.”
This all might represent a peak of the relative star power of hedge funds, of course, as the inexorable draining of personality and the human touch from investing reaches hedgies and activists, too.
It’s worth noting the main direct beneficiary of Gross’s defection so far seems to be DoubleLine Funds, which has seen a surge in new money arrive in its mutual funds in the past week. DoubleLine is run by leading bond manager Jeffrey Gundlach, who left Trust Co. of the West on troubled terms and built DoubleLine from zero to $56 billion in five years. He commands enormous crowds when he speaks in public, and his every utterance about interest rates is considered oracular.
He is, in other words, a star.