Team-based management got a big endorsement in October of last year, when Fidelity Investments announced it was embracing a team-oriented approach to fund management.  Team management is widely employed throughout the fund management industry, with 919 of 2,171 (42%) of funds reporting more than one manager.  That includes American Funds’ Growth Fund of America, the largest mutual fund with $178 billion in assets, which boasts 10 portfolio managers and more than 40 analysts, according to a Reuters report.

Academic studies have shown that team-managed funds enjoy a marketing advantage, attracting more assets than their single-manager counterparts.  But the same studies have shown that team-managed funds perform no better than single-manager funds.  A new study, “Horses for courses: Fund managers and organizational structures,” sheds light on this apparent anomaly.  Team management may indeed be the more effective structure for mutual funds, even though these funds will not attract the highest-performing star managers.

The study has important implications for advisors.  Team-based management is a superior structure and leads to better performance.  Advisors selecting single-manager funds need to pay special attention to the skill set of the manager.

The study’s authors are Yufeng Han of Tulane University, Thomas Noe of Oxford, and Michael Rebello of the University of Texas at Dallas.  We spoke with Professor Noe on September 6, 2008.

Comparing Performance in Team- versus Single-Manager Structures

Noe and his co-authors began with the hypothesis that a single-manager structure offers a critical advantage to skilled fund managers, allowing them to follow a management style that better reflects their personal abilities.  By contrast, in a team management structure, an individual manager’s abilities are clouded by those of their co-managers.

But this opportunity for skilled managers to display their abilities carries a cost.  The study shows that single-managed funds tend to have more eccentric portfolio holdings when compared to peer group averages based on investment style. 

Noe and his coauthors show that team management results in superior performance when measured across the fund universe.  Superiority is evident through a difference in alpha of 873 basis points, using the Fama-French three factor model.  But, consistent with prior studies, this performance advantage disappears when investment style is controlled for.  Approximately 60% of team-managed funds fail to achieve the expected level of style-adjusted performance, which has led many in the investment industry to criticize the team-based approach.

Team-managed funds exhibit a tilt toward stocks with higher capitalization, growth (low book-to-market ratio), and momentum, resulting in a slightly lower beta, as compared to single-manager funds.  This finding indicates greater conformity in investment style among team-managed funds, whose holdings are significantly closer to peer group averages based on their investment style.

The distribution of single- and team-management structures across the nine style boxes is shown below.

(Note: S=small; M=medium; L=large; G=growth; B=blend; V=value)

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