Divvying up management

When you think about who is managing your mutual fund, you might imagine a single person making most of the decisions. But portfolios are often divided among a team of people, or even split between sub-advisers with dramatically different investing styles, an approach known in the fund world as multi-management.

For small investors, there can be some advantages to having your dollars divvied up among different managers, said Russ Kinnel, director of funds research at Morningstar Inc. Unlike offerings that are team-managed – meaning they’re run by a group of people working under the same roof – funds that use a multi-manager approach seek out sub-advisers with different investment strategies, styles and research, which can diversify risk and smooth out volatility.

“What you’re doing is diversifying at another meaningful level that you’d have to pick separate funds to do,” Kinnel said.

If you invest in offerings from companies like Fidelity Investments, American Funds or T. Rowe Price, you probably haven’t run across portfolios that take this approach, because these shops manage most or all of their money in-house. Prominent fund providers that outsource the management of funds to sub-advisers include the Vanguard Group, Masters’ Select Funds and American Beacon Advisors, a subsidiary of AMR Corp. that grew out of American Airlines’ pension fund.

One advantage of multi-managed funds is that they often allow small investors to place their money with excellent professional managers who they might not have access to otherwise, said Wayne Wicker, chief investment officer of Vantagepoint Funds, a family of offerings for public employees that uses the approach. They also eliminate the risk that comes with putting all your eggs in one basket.

Best known for its index funds, Vanguard also offers 26 actively managed equity funds, most of which are run by carefully chosen outside sub-advisers. Of these, 11 are multi-managed, including Vanguard Windsor II (VWNFX), a $42 billion mid-and-large-cap value portfolio run by five different sub-advisers who each take a different approach. Jim Barrow, of Barrow, Hanley, Mewhinney & Strauss, is in charge of about 60 percent of this fund, while the other four sub-advisers handle pieces ranging from 5 percent to 15 percent, said Joe Brennan, principal in Vanguard’s portfolio review group, the team that monitors external advisers.

If it’s done right, the multi-manager approach can help temper short-term volatility without sacrificing returns in the long run, Brennan said. Multiple managers can also provide a way for fund companies to accommodate greater asset growth. The small-cap Vanguard Explorer fund (VEXPX) has farmed out its $10.2 billion in assets to six different sub-advisers. Divvying up the money, particularly in the small-cap space, makes the managers’ jobs easier, and has allowed the fund to grow far larger than a typical single-manager small-cap offering.

There’s a downside to this, however, Kinnel said. While Explorer has handled its growth well, and remains a Morningstar pick, the practice of adding more managers to handle asset growth can ultimately have a negative impact on performance, because it tends to produce an index-like portfolio.

Masters’ Select Funds tackles this problem in a clever way, Kinnel said. Ken Gregory, president of Litman/Gregory, the group’s adviser, brings in excellent managers, but asks them to run very concentrated portfolios of limited numbers of stocks. For instance, in the all-cap Masters’ Select Equity fund (MSEFX), six all-star adviserseach run a compact portfolio of no more than 15 stocks.