Stocks have momentum again, and even though the market cooled a bit last week, some on Wall Street are daring to speak of--gulp--a record-high Dow Jones industrial average, which is just a 9% gain away. Yet even if that pans out, here's one bull-market relic that won't be making a comeback anytime soon: the celebrity mutual-fund manager.
In a typical cycle, now is when stock-picking stars should be preparing to hatch--by jumping into a rising market early with big, brash bets and holding on for a glorious ride. But the tech meltdown of 2000 and a rash of fund scandals changed the game. Star power faded, and up stepped little-known (but not so little) American Funds to rewrite the script for success. American Funds woos investors with a team approach that insulates fund investors from the carnage that a single mistaken ego may unleash. The company is raking in money so fast that it has inspired copycats--just as its funds have grown so large they threaten to become unwieldy.
Nowhere is the team concept more ingrained or successful than at American Funds, whose managers avoid the spotlight like a stock headed for bankruptcy. The company's guiding theme: many heads with varying strategies, each doing his best with his slice of the fund, produce more good ideas and protect the fund from fads. "We've been doing it this way since 1958," says Drew Taylor, vice president of client services. "It's in our DNA."
At most fund companies, the idea of anonymous teams of managers investing funds is viewed as radical. Why? Star managers are money magnets. They get invited on TV; they lift a fund company's profile. Yet starless American Funds, part of Los Angeles--based Capital Group Cos., zoomed past star-centric Fidelity Investments this year in total managed assets through September--$738 billion for American Funds, $716 billion for Fidelity. The company is on track next year to topple kingpin Vanguard ($774 billion), which rode the popularity of index funds to surpass Fidelity in 2003. American Funds has quietly become home to six of the 10 largest stock funds in the U.S.--including the biggest of them all, the $117 billion Growth Fund of America. More than $1 of every $3 plunked into a fund these days goes to American Funds. Vanguard gets about $1 of every $5; Fidelity, just $1 of every $50.
Dreyfus and Morgan Stanley Investment Management are beefing up their analyst ranks in a nod to American Funds' research-driven culture. Putnam Investments now has teams of managers. Even Fidelity has added a second manager to its Blue Chip Value Fund and is hiring 75 analysts who will be aligned with specific funds. "Individual manager accountability is still the Fidelity way," says spokeswoman Anne Crowely. But Philadelphia-based mutual fund consultant Burt Greenwald says the firm is searching for ways to improve returns: "No question, Fidelity is feeling the heat."
The star system won't vanish as long as there are bona fide market beaters like Bill Miller, whose Legg Mason Value Trust is on track to outrun the Standard & Poor's 500 for a 15th consecutive year. "But the industry is waking up to the scale problem that even stars have when a fund grows large," says Christine Benz, author of Morningstar Guide to Mutual Funds.