Morningstar - Q4 2021 - 53

Strategies
Who's Helping Fund Managers Manage?
Analyst staffs are important, but don't
stress about their numbers or traits.
ANALYSTS
Gregg Wolper
Portfolio managers generally receive all the
credit-or blame-for the performance of
their funds. That's understandable. Their names
appear in the prospectus, they sign the
shareholder letters, and in nearly all cases, they're
the ones making the final decisions on
what to buy or sell, when to make the trade,
and in what quantity.
But the reality is more nuanced. Except in rare
cases, fund managers don't work alone.
Behind the scenes, their research analysts are
banging away: researching securities, evaluating
regulatory issues, monitoring and analyzing
macroeconomic developments. They're important,
but nearly invisible to most fund investors.
Managers or fund firms often boast about the size,
geographic spread, or other traits of their
analyst teams, but without any context, it's tough
for most investors to evaluate these claims.
Below is a guide to making sense of fund company
claims. Should analysts specialize in one area
or compare firms across many industries? Is
a bigger analyst team better? Does it matter if they
sit next to the managers or if they're located
closer to the companies they research?
It's best to take a skeptical view when fund
companies say that their way of doing
things provides a clear-cut advantage. In all
these areas, there is no single best approach.
Different Ways to Work
Some fund managers like to involve the
analysts in nearly every aspect of their work:
deciding whether a company is worth
owning, choosing a target price, discussing
position weights, and more. Analysts
involved to this extent often end up as managers
themselves. Other fund leaders prefer to
separate the roles. They want their analysts'
attention focused on researching and
evaluating companies and sectors. Worrying
about whether a stock would fit in the
fund's portfolio and at what price would serve
only as distractions. These managers think
that decisions on pulling the trigger on buys
and sells, position sizing, and balancing
different risks in the portfolio are the purview
and the responsibility of the manager alone.
Such managers don't necessarily think less
of their analysts' abilities. They're convinced that
researching companies and sectors, and the
government regulations that might affect
them, provide analysts with enough to digest, and
that adding more duties would be detrimental.
Knowing how to construct a portfolio, some
of these managers say, is a very different skill-
as are the additional responsibilities of a
portfolio manager, such as dealing with clients
or writing commentaries.
Both approaches have their benefits and
their limitations. A high degree of involvement
may take time away from specific company
research but better prepare one or more of
the analysts to step up to a comanager position-
taking some of the burden off the manager-
and eventually take over as lead manager
if the manager departs. Specialization allows
analysts to dig deep and focus only on company
prospects without being weighed down
by other duties-but leaves the fund in a bind
should the manager leave.
A Narrow Focus or Wide Lens?
Some fund managers want their analysts to be
generalists, able to evaluate companies
in just about any field. They think that approach
provides a broader context for judgment than
simply comparing companies in the same
industry. Also, some managers believe that sector
specialists will inevitably promote stocks in their
sector even if none are truly compelling. That
could occur because it's the only sector the analyst
knows, or to protect his or her job. (If the fund
hasn't owned an energy stock in several years,
who needs an energy analyst?)
Many other managers take the opposite view.
They prefer to hire specialists who focus
mainly, or solely, on just one sector, such as
technology or banking. They believe such
specialization allows researchers to develop a level
of expertise in their field that generalists
could never match. Sometimes a sector is
narrowed further, such as biotech or software
rather than healthcare or technology. The
biotech analysts at some firms even have
advanced degrees in medical or scientific fields,
and perhaps a prior stint in those fields
before they turned to investing. International
funds often have analysts specializing in
specific regions who may have lived there and
have language expertise.
Both approaches can succeed or fall short.
Neither should be considered prerequisites for
outperformance, because so many other
factors come into play.
From the Few to the Many
Fund firms with large analyst teams don't hesitate
to advertise that fact. As a result, investors
might be surprised to learn that some boutique
firms carry just a few analysts. Sound Shore
SSHFX, a U.S. large-cap stock fund with a solid longterm
record, has had three or four analysts to
assist its three managers. Rezo Kanovich, manager
of the excellent Artisan International Small-Mid
ARTJX, has only three analysts, and one of them
was hired just recently. AMG Yacktman YACKX has
built an enviable long-term record with a
minimal staff; for years, its two managers had only
two analysts. (One was recently promoted to
comanager and replaced by a new junior analyst.)
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53
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