Morningstar - Q4 2021 - 54

Strategies
At the other extreme are the giants like Fidelity,
which according to a recent count, had 110
stock analysts stationed in Boston, London, and
Tokyo, along with many additional analysts
who focus on sectors or countries. (Still others
focus on fixed-income or other asset classes.)
T. Rowe Price, Putnam, and Dodge & Cox also have
extensive teams, as do Franklin Templeton
and Capital Group (American Funds). Portfolio
managers in these bulked-up organizations
can typically see hundreds or thousands of
research notes amassed by the research teams,
contact any individual member for a direct
conversation, or ask for further investigation into
a specific company or topic.
Many firms lie somewhere between these two
endpoints; analyst staffs in the teens, 20s, or 30s
are common. Sometimes, portfolio managers
with a particular expertise will serve as the analyst
for that sector, so the number of " analysts "
on a staff can vary depending on whether the firm
includes those managers in the count.
Is Bigger Better?
So, what is the optimal size for a research
team? One might assume that having scores of
analysts provides a clear advantage. But over
decades of covering mutual funds, Morningstar
manager research analysts haven't found
that to be the case. Neither is a small, tightly
focused group inherently superior. Other factors
play key roles in determining fund success.
One variable is the number of strategies an
analyst staff must support. A team responsible
to a large array of managers running funds
of many different styles-like Fidelity's group-
would almost certainly need to be larger than a
team supporting just one strategy. Another
variable is stability. A stable team instills more
confidence than one suffering personnel turnover
year after year. Also important: how well
the managers and analysts communicate with
each other, and how talented the analysts
are in identifying promising targets and warning
against companies with weak prospects.
Quality and Stability Outweigh Numbers
The last point is critical. More important than size
is the quality of the analysts and the stability
54
Morningstar Q4 2021
Boots on the Ground or Shoes in the Office?
Fund firms-especially those featuring
international funds-also boast about the
geographic reach of their analyst staffs.
As with large teams, this might appear at first
glance as an obvious benefit. Sometimes it is:
We've spoken with managers who can
cite cases where their locally based analyst alerted
them to information that was unmentioned
in company financial reports, discussions with
executives, or news stories that served
the managers well in making portfolio decisions.
Some funds with globally spread-out teams
have thrived.
But a global footprint is not a necessity. Until
the disruptions caused by the COVID-19
pandemic, Dodge & Cox's large pool of managers
and analysts all worked in the same office in
San Francisco. With this all-in-one-place approach,
the firm established a strong reputation for its
value-focused lineup, which includes international
and global offerings. Only in April did it establish
an indirect subsidiary in Shanghai to provide
supplemental China-focused research. Similarly,
the small staffs of Invesco Developing Markets
This information isn't necessarily easy to find.
To get detailed information on the staff supporting
the manager, beyond the impressive but
limited nuggets shared in fund advertisements
and PowerPoint presentations, one must be
in communication with the fund company. That's
because fund companies aren't required to
publicly disclose analyst arrivals and departures
or team structures, as they must for named
portfolio managers. But many financial advisors
and fund researchers-like those of us at
Morningstar-who communicate regularly with
fund personnel do have the opportunity to
acquire this information (with rare exceptions).
Even when such information is available, though,
it shouldn't be overemphasized. As interesting
as the makeup of a fund's research team
can be, it usually offers little guidance to a fund's
appeal as an investment. It's just one data
point among many when considering whether
to invest in a fund. K
Gregg Wolper, Ph.D., is a senior manager research analyst
at Morningstar Research Services LLC.
of the team. Goldman Sachs' value and growth
teams that focused on U.S. stocks (before they
merged into one group in early 2018) boasted more
analysts than Sound Shore, AMG Yacktman,
and Kanovich's fund added together; but constant
personnel turnover-and in some cases, poor
stock choices-hobbled their funds' performance.
Simply hiring more analysts wouldn't have
improved anything.
In fact, after the merger of the two teams, the
firm had significantly fewer analysts researching
U.S. stocks. Although the claim must be
taken with a grain of salt, the firm said it kept
the best analysts from each team and let
the others leave or find other positions in the
organization. Although it hasn't been a
long time, if anything, performance seems to
have improved since the consolidation.
By contrast, the analysts from Sound Shore,
Yacktman, and Kanovich's Artisan International
Small-Mid have worked with their managers
for many years, with departures rare.
ODMAX and Artisan International Small-Mid also
reside in the same office with the managers,
and both strategies have amassed outstanding
records. Nearly all of Harding Loevner's
bigger investment staff, which guides a suite
of impressive international funds, is based
in New Jersey.
Conversely, Longleaf Partners had investment
personnel stationed in Japan and Europe, but that
didn't prevent Longleaf Partners International
LLINX from getting waylaid by a fraud scandal in
Japan's Olympus OCPNY in 2011 and being
hurt badly by the crash of Allied Irish Banks and
other European construction-related stocks
during the 2008 financial crisis.
Limited Value
It would be counterproductive, therefore, to invest
in a fund based on the size, working arrangements,
or location of its analyst staff. However, it's
reasonable to be wary of frequent analyst turnover
or if a firm often changes the structure or
responsibilities of its investment professionals.
https://www.morningstar.com/funds/xnas/odmax/quote https://www.morningstar.com/funds/xnas/llinx/quote https://www.morningstar.com/funds/xnas/llinx/quote https://www.morningstar.com/stocks/pinx/ocpny/quote https://www.morningstar.com/authors/13/gregg-wolper https://www.morningstar.com/funds/xnas/odmax/quote
Morningstar - Q4 2021

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