Management Tenure

Management tenure is the length of time that a manager has been at the helm of a mutual fund. A long-term fund performance record, preferably of five to 10 years, is thought to be a key indicator of a fund manager's investing ability.

Mutual fund investors are thought to be best served by investment managers who have proved themselves over an extended period of time. The more closely matched a manager's tenure is with a solid fund performance record, the better.

For example, let's compare two different funds: The XYZ Fund has an annualized average 10-year total return of 11 percent and has been run by the same manager during that period. The ABC Fund has the same 10-year annualized average total return of 11 percent, but it has had two different managers. One's tenure covered the first nine years and the second has been on the job for only one year. Will the second manager be just as good as the first?

Mutual fund data firm Morningstar uses the following system to give a management tenure score for funds with more than one manager:

• For funds with more than one manager, the average tenure is shown. If there is only one manager and he/she has been at the fund for less than six months (and there is biographical information available), a dash will appear.
• If the fund designates the manager as a management team and does not disclose the names of the portfolio manager or co-portfolio managers to Morningstar, manager tenure will appear as a dash for the fund.

Experts are split on what management tenure means. A study in the 2014 issue of the Financial Analysts Journal titled “The Career Paths of Mutual Fund Managers: The Role of Merit,” by Gary Porter and Jack Trifts, explored whether longer-tenured managers delivered alpha, or outperformance relative to the overall market.

Their study covered the period from 1996 through 2008. The data set incorporated 2,846 funds and 1,825 managers, and included 195 funds with managers that had at least 10 years of experience (6.9 percent of the total). Their research resulted in three key findings:

• Turnover is partly related to performance. Poor performance does lead to firing.
• In any given year, even the longest-surviving solo managers are unlikely to produce significantly more positive style-adjusted monthly returns than negative ones.
• While longer-tenured managers outperformed their peers, they show no ability to deliver alpha, or outperformance relative to their risk-adjusted benchmarks.

The authors concluded: “The key to a long career in the mutual fund industry seems to be related more to avoiding underperformance than to achieving superior performance.”