The Pros and Cons of Multi-Manager Mutual Funds

Forbes had a good article by Dan Weiner on the Vanguard Windsor II Fund where he criticizes the recent addition of yet another mutual fund manager. Here are some highlights from “Too Many Managers In The Fund Kitchen”:

Vanguard announced last January that it’s handing an 8.5% piece of the Vanguard Windsor II Fund (VWNFX) to Sanders Capital, and in particular John Mahedy, who used to work on Windsor when he was at AllianceBernstein. Unfortunately, rather than give Mahedy and his team a mandate to run a value fund, Vanguard is simply continuing to add chefs to the Windsor II kitchen, and the meal gets less and less tasty with each one.

I’m one of the leading experts on Vanguard funds, so this is particularly irksome to me. But the bigger lesson that you can take away from the increasingly messy management of Windsor II is that multimanager funds are almost always bad news for your 401(k)….

Between 1991, when Vanguard added its internal team to Windsor II’s mix, and the subsequent hiring and firing that’s occurred over the past 16 years, Windsor II has failed to match, much less beat the benchmark……

Vanguard (along with its mutual fund compatriots T. Rowe Price, Fidelity and others) claims that multimanagers add to diversification. There is some truth to that, but what these investment companies can’t point to is improved performance from its multimanaged funds. Good luck getting them to admit that, though.

The bottom line is that there is such a thing as too many cooks in the kitchen. Not only do more managers mean more suits looking for a chunk of your 401(k) money via fees and other expenses, it also means that any clear strategy for your nest egg is diluted. Management by committee indeed reduces risk, but as Windsor II shows it also reduces returns.

[Emphasis added]

Aside from the performance issues discussed by Mr. Wiener, there are other problems introduced when a 401K plan creates special funds with more than one asset manager. These special funds have no ticker available and there is no way to research their performance on web sites such as Morningstar.

I have about 10% of my retirement assets invested in a Citigroup 401K plan. The fund choices have had fairly good performance and have low expense ratios. But many of the selections are multi-managed and do not have a ticker available. I use some quantitative models to manage the assets, but have been forced to “map” the multi-managed funds to other funds or ETFs that are highly correlated with them. Instead of offering these multi-manager funds, it would be better for Citigroup to offer separate fund choices for each manager, and let their employees decide how to allocate their funds between these managers.

Full Disclosure: No position in Vanguard Windsor II.

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