Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, May 27, 1990 TAG: 9005240031
SECTION: BUSINESS PAGE: F1 EDITION: METRO
SOURCE: STAN HINDEN THE WASHINGTON POST
DATELINE: LENGTH: Long
That was the day he found out that Peter Lynch, the legendary manager of Fidelity Investment's $13 billion Magellan Fund, was retiring - "hanging up his Quotron," or stock quote machine, as Smith later characterized it.
It was also the day Smith was asked to be Lynch's successor.
"It was a complete shock," said Smith, who was then managing the $700 million Fidelity OTC (over-the-counter) fund. After a day of discussing the offer with his wife, Devora, and their three children, Smith said "yes."
His wife's advice, Smith recalled, was, "Don't drive yourself crazy," meaning, Smith said, "Keep your perspective."
Keeping their perspective, sticking to the game plan and avoiding panic are all high on the list of "musts" for Fidelity money managers, who are now responsible for investing $115 billion of other people's money in more than 100 funds. Fidelity, based in Boston, is the nation's largest mutual fund management company.
Across the country, as mutual funds continue to grow apace, portfolio managers have more than $1 trillion in their hands.
But few of them have the visibility of a Peter Lynch. Most of the nation's portfolio managers are unknown to their investors.
That factor, along with the changing leadership at Magellan, have focused new attention on the question of whether mutual funds should do more to inform investors about the identities, abilities and experience of their fund managers - giving investors a chance to choose not only their investment objectives but the individuals they believe are best able to reach them.
The Securities and Exchange Commission staff believes the funds should do more, and it is at work on a set of rules that would require the funds to give shareholders the name of any manager or analyst who makes a significant contribution to a fund's investment decisions. The SEC position is that investors have a right to know who is in charge of their money and should be told promptly when changes take place among portfolio managers.
An SEC staff recommendation to the commission is expected in late summer or early fall.
The idea of identifying portfolio managers has drawn opposition from segments of the fund industry that contend that the rule will raise the funds' operating costs and will cause considerable inconvenience when changes occur rapidly.
Some funds say they already identify their managers; others say that since they manage by committee, it is not always possible to identify an individual as being responsible for a given fund.
When Lynch announced he would leave May 31, Fidelity hastened to reassure Magellan investors that Lynch and Smith had worked closely together in the past and had similar investment styles. And thus far, it appears, relatively few Magellan investors have jumped ship because of concerns over the loss of Lynch's leadership.
Lynch's final two months at Magellan have been spent with Smith and Fidelity's stock analysts going over the 1,400 stocks in the $13 billion portfolio, deciding which to keep and which to drop.
George Vanderheiden, leader of the Growth Group at Fidelity, which includes Magellan, said that by the end of the process, Smith will have cut down on the total number of stocks. "Fourteen hundred is too many," he said.
Lynch, who was once described as a man "who never met a stock he didn't like" often defended his wide array of investments by noting that 100 of his 1,400 stocks accounted for 48 percent of his assets.
The intense review of Magellan's stocks was needed to bring Smith up to speed on the portfolio, Vanderheiden said.
"A new portfolio manager coming into a fund wants to get his arms around everything," he added. "Morris now has the feeling of conviction in each of the stocks that Peter had. They are meeting every day, going through the stocks, meeting with the analyst who covers the stock, thrashing each one out. It's a long process."
If there is a common thread between Lynch and Smith, it is their devotion to the Fidelity culture of trying to peer continually into the inner workings of almost 3,375 domestic and foreign companies in which Fidelity owns shares and another 1,000 companies in which it might be interested.
Fidelity's 55 portfolio managers and 68 analysts and aides not only visit companies regularly, which is common among fund managers, but five or six companies come trooping into Fidelity's offices each day to spend an hour or so with analysts and portfolio managers, filling them in on what's happening to their companies, their competitors and their industry.
Although many investment companies emphasize research, Fidelity conducts its research operations with a near-religious fervor. While no amount of research can turn back a falling market, such as the one that hurt Fidelity equity funds in the first quarter, Fidelity has tried to turn its research into an early-warning system that highlights both shaky stocks and money-making opportunities.
On any given day, Smith talks by phone or in person with six or seven company managements in a never-ending effort to know everything he can about his stocks. Heavy turnover, however, is a way of life in growth-fund investing. In Smith's OTC fund, the turnover rate is 171 percent. So he should have little trouble with Magellan's turnover rate of only 77 percent.
"We're not married to our stocks," said Fidelity's research director, Richard Spillane, recalling the story of a conversation between Lynch and Chrysler Corp. head Lee Iacocca, in which Iacocca said he was pleased that Lynch had bought his stock. Iacocca asked Lynch how long he would hold it.
"Until the next best idea comes along," Lynch is reported to have said.
At the moment, as American investment abroad rises rapidly, Fidelity is trying to create an overseas research staff equal to the domestic staff. Fidelity has sent Richard Habermann, former director of domestic research, to London to direct the buildup of an international research operation.
Portfolio managers, like stocks, come in many shapes, sizes and temperaments. Many are the best and brightest products of the nation's business schools.
But managing money is more than a numbers game.
"When I came into this business," said Bruce Johnstone, leader of Fidelity's Income Growth Group, "I was under the mistaken impression that if you were a genius at math, this business was perfect for you. But I found out over the first several years that that's really only half of the equation. The other half, we found out, is that you really have to have an artistic sense as well."
Alan Leifer, head of Fidelity's Trend Fund, said it requires "intellectual drive" to be a successful fund manager.
"We live in a world of ideas," he said. "The market, over time, will prove out which ideas work and which ideas don't. You have to want to work in the world of ideas.
"Second, it clearly takes the ability to stand alone in the world. The best investment ideas are the ones that you pick up when the world is giving away the stock because of near-term concerns."
Another aspect of the job that most portfolio managers don't talk about is the tension.
"Being a portfolio manager is gut-wrenching," said Richard Fontaine, who runs his own money management firm in Baltimore and formerly worked at T. Rowe Price Associates.
"The truth is that nobody knows what is going to happen tomorrow. But you're standing there with a lot of people's money and hoping it will work out. The anguish of being wrong is what gets to people. You get the feeling you've destroyed people's lives.
"Most of the real tension and stress comes from the feeling that you're betraying your responsibility. That's why people age so quickly in this business."
Fortunately, the stress pays off not only in gray hair but in greenbacks.
Portfolio managers - especially the stars - are well paid by any standards - Lynch's annual compensation reportedly was in the millions. Industry figures indicate that portfolio managers on the average earn between $60,000 and $225,000 a year in base salaries - and between $88,000 and $300,000 a year with bonuses. At Fidelity, the carrot for its 55 portfolio managers is a bonus system based on a three-year average of how a fund performs - when compared to a national market average and to its peers at other fund families.
For instance, if the Standard & Poor's 500 is down 10 percent for the year, but a Fidelity fund is down only 5 percent, that fund manager will get a bonus for beating the market.
The bonus payments also depend on the performance of each fund's investment group and, finally, on the performance of Fidelity itself. Because Fidelity is a private company, specific figures are closely guarded.
Beating the market is tough for most managers to do.
And, indeed, portfolio managers often guess wrong, Smith noted.
He recalled a favorite saying in the money management business:
"If you're right 50 percent of the time, you're doing good. If you're right 55 percent of the time, you're doing great. And if you're right 60 percent of the time, you're lying."
by CNB