Widespread concern about an expected rise in interest rates and increased scrutiny of an active manager's ability to beat benchmarks are two challenges for any fund executive in the current market.
But firms still have many managers deep within their benches that have found strategies to deliver significant returns for investors.
Some have found success by offering unique alternative strategies - as Michael Gregory has done in health care offerings from Highland Alternative Investors, or sticking to a simple but reliable investment formula, like the one employed by Ray Kennedy at Hotchkis & Wiley. The two investment heads were selected by Money Management Executive after interviews with leading firms on some of the fund managers to watch this year.
Understanding the Fed's intent toward interest rates has kept many managers occupied in recent months, says Sean Collins, the senior director of industry and financial analysis at the Investment Company Institute.
"In 2014 and continuing into this year, portfolio managers have been keenly attuned to how and when the Federal Reserve would adjust monetary policy," Collins says.
Steve Wruble, chief investment officer and head of investment management research at FolioMetrix, says that despite a healthy market, managers still need to place a premium on risk, as a downturn could suddenly happen.
"Tactical risk management involves scaling up traditional beta exposure during favorable time periods - we believe it is important to not only have a diversified lineup of products for up markets, but also to have a diversified set of down-market methodologies to reduce systemic beta when it starts to have an inverse correlation to alpha," he says.
Another challenge for managers, adds Tom Howard, CEO and director of research at AthenaInvest, is remaining aware of various portfolio tax decisions.
A survey that Howard is currently conducting with Schwab chief investment officer Jim Peterson has so far found that while stock picking skills from 2001 to 2014 hovered at nearly 5%, but portfolio tax has increased 3.7% since 2008.
According to their research, roughly 90% of fund managers during this period had selection skills sufficient to cover their fees, but not the tax costs.
"So, the reason so many funds underperformed in 2014 was not for lack of skill but due to increasingly destructive portfolio management decisions," Howard says. "So the collective fund alpha was less than zero, thus delivering no value to investors."
Howard says fund managers will continue to suffer outflows unless funds begin delivering value to their investors by reducing tax inefficiency.
"It is really pretty simple," he says. "Funds have the solution to their outflow problems inside in their own organizations: buy side analysts, and it is up the fund to take the steps necessary to deliver this value add to investors."
One interesting solution: A new Morningstar study shows portfolio managers investing more than $1 million in their own funds enjoyed a higher success rate than those who put little in or nothing at all.
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- Michael Roach
Age: 38
Fund: Vanguard Strategic Equity Fund
Fund AUM: $6.2 billion
Total Returns:
- YTD: 5.28%
- 1-year: 16.92%
- 3-year: 21.12%
- 5-year: 17.58%
Roach has focused his work at the Vanguard Strategic Equity Fund on quantitative portfolio construction with Vanguard's Quantitative Equity Group, managing roughly $22.7 billion, according to the firm. During his leadership, the fund saw a 26% return over the 12 months ending in May 2014, according to Consumer Reports.
- John C. Bailer
Age: 46
Fund: BNY Mellon Income Stock Fund (High Dividend Income)
Fund AUM: $1.27 million
Total Returns:
- YTD: 3.56%
- 1-year: 13.05%
- 3-year: 18.12%
- 5-year: 14.26%
Bailer is portfolio manager and senior research analyst on the Dynamic Large Cap Value strategy, where he is responsible for consumer, technology and telecommunications sectors. As the BNY Mellon Income Stock Fund normally invests in roughly 80% of its net assets, Bailer has focused efforts on dividend-paying stocks.
- Ray Kennedy
Age: 54
Fund: Hotchkis & Wiley High Yield Fund
Fund AUM: $2.6 billion
Total Returns:
- YTD: 2.77%
- 1-year: 1.09%
- 3-year: 17.96%
- 5-year: 19.10%
A 29-year veteran who joined the firm in 2008, Kennedy oversees investment research, decisions and day-to-day management of all high yield bond portfolios. The Hotchkis & Wiley High Yield Fund carries a 0.75% expense ratio and has a total return of 13.68% since 2009, the firm said. Morningstar ranked the fund's risk as average.
- Henrik Strabo
Age: 55
Fund: Rainier International Discovery Fund
Fund AUM: $45 billion
Total Returns:
- YTD: 12.20%
- 1-year: 7.38%
- 3-year: 19.69%
- 5-year: N/A
Strabo both builds and manages Rainiers' international small cap capabilities. Its international fund focuses on small- to medium-sized companies based in foreign markets with strong earnings prospects, according to the SEC, adding Strabo selects stocks based on Rainier analysis, rather than on broad economic forecasts.
- Michael Gregory
Age: 37
Fund: Highland Long/Short Healthcare
AUM: $579 million
Total Returns:
- YTD: 9.04%
- 1-year: 10.28%
- 3-year: 14.43%
- 5-year: 11.57%
The CIO and global head of Highland Alternative Investors, Gregory is managing director of the Healthcare Credit and Healthcare Long/Short Equity investment strategies. Last year the fund returned 17.1%, and the firm says it is a great way "to 'play' Obamacare." Liquid alts are now highly represented in Highland AUM, Morningstar notes.
- Ford O'Neil
Age: 53
Fund: Fidelity Total Bond Fund, taxable bond portfolios.
Fund AUM: $19 billion
Total Returns:
- YTD: 2.35%
- 1-year: 5.37%
- 3-year: 3.98%
- 5-year: 5.29%
As portfolio manager of the Fidelity Total Bond Fund since 2004, O'Neil has focused on global fixed income sectors. He uses Fidelity Total Bond Fund's wide-ranging mandate to invest in any type of bonds where he believes there is value, the firm said. The fund can also invest up to 20% of its assets in high yield securities.
- Anne Lester
Age: 50
Fund: The J.P. Morgan SmartRetirement Series
AUM: $58.9 billion
Total Returns:
- YTD: 2.56%
- 1-year: 6.55%
- 3-year: 6.53%
- 5-year: 6.64%
Lester has worked on how to better focus strategies toward retirement issues faced by corporations and governments worldwide. She also leads the development of the firm's DC asset allocation strategies, including the JPMorgan SmartRetirement target date funds and the firm's Dynamic Withdrawal strategy.
- Philip Brides
Age: 35
Fund: UBS Global Allocation Fund
Fund AUM: $523 million
Total Returns:
- YTD: 3.34%
- 1-year: 9.70%
- 3-year: 8.35%
- 5-year: 6.60%
As senior portfolio manager and managing director in the asset allocation and currency team at Global Investment Solutions, Brides develops strategy for both growth and income-oriented mandates. This includes overseeing roughly $5 billion in global allocation strategies domiciled in the U.S., Luxembourg and U.K. versions.
- Nicholas Williams
Age: 47
Fund: Baring International Small Cap
Fund AUM: $38.7 million
Total Returns:
- YTD: 8.26%
- 1-year: 3.16%
- 3-year: 7.00%
- 5-year: 4.87%
Williams heads the small cap equities team, manages the Baring Europe Select Strategy and co-manages the Baring European Opportunities Strategy. The London-based Williams previously oversaw $589 million of institutional and retail European funds across the capitalization range at Singer & Friedlander.
- Mark Simenstad
Age: 56
Fund: Thrivent Diversified Income Plus Fund
Fund AUM: $1.17 billion
Total Returns:
- YTD: 2.79%
- 1-year: 5.26%
- 3-year: 7.94%
- 5-year: 8.43%
As vice president of fixed income mutual funds, Simenstad has said that he likes fixed income with adjustable rate features, a strategy he says keeps pace with rising rates. The strategy paid off this year the fund was honored this year with the Lipper Fund Award for Best Mixed-Assets Small Fund Family.
