60 / 708
9
Morningstar FundInvestor
February
2016
An Outlier
Dodge
&
Cox does not explicitly link bonuses to fund
performance. It believes that tying compensation
directly to returns might adversely promote competi-
tion instead of constructive teamwork. Instead,
the firm focuses on the caliber of investment ideas
and industry insight. Morningstar generally favors
a compensation structure that specifically links port-
folio-manager pay to long-term fund results, but
there is no reason to question Dodge
&
Cox’s focus on
the long haul. Over the past five years, the firm’s
equity funds had an average turnover of just
15%
, and
it has one of the highest manager-retention rates.
Does Compensation Structure Influence Portfolio
Turnover or Manager Tenure?
One might expect firms that emphasize long-term
returns to have funds with low portfolio turnover,
and vice versa. That appears to be the case in some
circumstances. American Funds, Oakmark, and T. Rowe
Price’s equity funds had below-average turnover
during the past five years as compared with other firms
in Table
1
. However, the relationship is weak in
other instances. For example, Lord Abbett and Franklin
Templeton use the same compensation structure,
though the former had an average turnover of
111%
versus
33%
for the latter.
It also would be reasonable to assume that including
a longer assessment period leads to greater retention
of managers, by encouraging skippers to stay put.
That seems to be the case with Oakmark and American
Funds, though T. Rowe Price’s average manager
tenure ranks lower than most peers’ in Table
1
.
PIMCO
has the shortest average tenure of the bunch, but that
owes largely to Bill Gross’ recent departure.
K
Contact Leo Acheson at
leo.acheson@morningstar.comTable 1
How the Largest Active Management Shops Determine Portfolio-Manager Bonuses
Time Periods (years) Evaluated to
Determine Manager Bonuses
Investment Firm
Active Mutual
Fund AUM Bill ($)
1
1 2 3 4 5 6 7 8 9 10
Time Period
Weighting Scheme
2
Avg Horizon
(years)
3
Average Equity
Fund Turnover (%)
4
Average Longest
Manager Tenure (years)
T. Rowe Price
447.3
• • •
•
Equal
4.75
44
7.1
Oakmark
79.2
• • •
•
Equal
4.75
34
17.1
American Funds
1,198.1
• • •
•
Progressive
4.25
27
11.4
Fidelity
1,073.6
• •
Equal
4
91
6.0
JPMorgan
270.3
• • •
Progressive
3
80
7.9
Janus
106.2
• • •
Progressive
3
55
6.3
American Century
100.8
• • •
Progressive
3
97
8.4
The Hartford (Wellington)
93.4
• • •
Progressive
3
84
7.4
Oppenheimer
181.4
• • •
Progressive
3
55
7.2
Invesco
138.6
• • •
Progressive
3
41
7.0
Columbia
138.9
• • •
Progressive
3
71
6.8
BlackRock
216.3
• • •
Equal
3
86
5.7
Franklin Templeton
409.7
• • •
Equal
3
33
14.6
MFS
178.4
• • •
Three-year emphasized
3
48
9.9
Lord Abbett
101.5
• • •
Equal
3
111
7.6
Goldman Sachs
90.5
• • •
Equal
3
90
7.6
Putnam
71.3
•
Equal
3
80
8.8
PIMCO
299.5
• • •
Dollar-weighted
2
—
3.4
Waddell & Reed (& Ivy)
82.5
• •
Equal
2
58
9.2 (5.9)
Dodge & Cox
183.4
—
—
15
21.7
Median
0.20
3
58
7.6
1
As of 11/30/2015. Excludes fund-of-fund and money market assets.
2
Equal
means the firm places even weight on each measurement period;
progressive
means the firm places increasing weight on each succeeding
measurement period.
3
Calculated as the average of time periods (in years) used to determine bonuses; if performance is more heavily weighted to the long term, the greater-than symbol (
) is added before the average.
4
The average turnover of a firm’s equity funds during the past five years through 2014. Source: Morningstar.