Lower returns, cloudy futures for some top fund mgrs

By Muralikumar Anantharaman

BOSTON, Nov 11  - As the financial crisis hammers fund returns, many managers are touting their stable long-term records to convince investors that their money is safe. But that argument may soon vanish.

The 10-year returns of many funds have held up in the face of recent losses in part because of huge stock market gains in the fourth quarter of 1998. As this year ends, those returns will reflect a new decade of 1999 to 2009, a period that could look miserable for some big funds.

This could put more pressure on the legacies of some prominent managers and may even threaten their survival.

"If you think things look bad now, wait till the end of the year when we lose the fourth-quarter 1998 return. Ten-year returns will look horrible," said Daniel Wiener, chief executive of Adviser Investments Inc, a Newton, Massachusetts, advisory firm that manages $1 billion.

Stocks soared in the last quarter of 1998 in the run-up to the technology bubble, lifting the Standard & Poor's 500 Index .SPX> 21 percent in the quarter.

Many advisers and institutions base investment decisions on long-term returns and their declines could spur calls from angry investors for managers to be fired. Firms may find it difficult to justify retaining poorly performing managers even as they ax hundreds of other employees.

"We are going to see some star managers lose their stardom permanently and maybe leave the industry altogether," said Karen Dolan, director of fund analysis at Morningstar Inc.

Bill Miller of Legg Mason Inc is one well-known fund manager whose future is the subject of much market speculation. The only manager to have beaten the Standard & Poor's 500 index .SPX> for 15 straight years to 2006, Miller's performance in his main Value Trust Fund has slipped dramatically since then.

WORST PERFORMER

The fund is the worst performer in its category, off 28.2 percent in the current quarter and down 54.5 percent this year, according to Lipper Inc data. That compares with the S&P index's negative 20.9 percent and 36.9 percent returns for the quarter-to-date and year-to-date, respectively.

Miller's Value Trust returned 48 percent in 1998, its best showing in the past decade, according to Lipper data. Its current annualized 10-year return of negative 2.6 percent will look a lot worse if the 1998 returns are excluded from calculations.

The Value Trust's size had shrunk to $7.6 billion as of Sept. 30 from $20.6 billion in mid-2007.

Miller's $3.2 billion Opportunity Trust is worse off, down 62.2 percent so far this year and is ranked by Lipper at the bottom of its category.

Heavy exposure to the financial and consumer discretionary sectors, which have been battered by the worst financial crisis since the 1930s, is hurting Miller, chairman of Legg Mason Capital Management (LMCM), a unit of Legg Mason.

LMCM said last month it is cutting up to 50 jobs, or about a third of its staff, to combat the slump in assets but would not fire senior investment professionals.

Legg Mason said its backing for Miller, 58, was unwavering. But analysts are critical.

"He has been woefully out of step with the market," said Jeff Tjornehoj, senior research analyst at Lipper, a unit of Thomson Reuters. "It's disappointing that he should wind up so far behind."

Fidelity Investments' Harry Lange and Tim Cohen, managers of the Boston firm's flagship Magellan fund and the Growth & Income Portfolio, respectively, are also under scrutiny.

ILL-TIMED BETS

Lange's ill-timed bets on the financial sector this year pushed Magellan returns down 26.6 percent this quarter and 49.1 percent so far in 2008. The fund's size has more than halved in 2008 to $21.5 billion now and it ranks as the third-worst in its category, according to Lipper.

Magellan returned 33.6 percent in 1998 and excluding that year would mean its current 10-year return of a negative 2.1 percent will fall more.

Cohen's $7.6 billion Growth & Income Portfolio, which has lost 26.3 percent this quarter and 49.1 percent this year, is ranked the second-worst in its category by Lipper.

Privately owned Fidelity, the world's biggest mutual fund company, said last week it was making its biggest layoffs in six years and would cut nearly 1,300 jobs, or about 2.9 percent of its workforce, this month and more jobs in early 2009.

Fidelity spokesman Vin Loporchio said the company's funds as a group beat more than 60 percent of their industry peers on an asset-weighted basis for the three-, five- and 10-year periods ended on Sept. 30.

Mason Hawkins and Staley Cates of the Longleaf Partners Funds as well as Richard Pzena of Pzena Investment are also among famous fund managers whose performances have tumbled this year and whose long-term returns are under strain.

Hawkins' Longleaf Partners Fund is down 34 percent this quarter to be the worst performer in its category and has lost 50.1 percent so far this year, according to Lipper. Pzena-managed John Hancock Classic Value Fund is down 25.9 percent this quarter and off 47 percent this year.

Representatives for Longleaf and Pzena were not immediately available for comment.

Dolan of Morningstar said star fund managers may be able to survive the financial crisis if they make a strong recovery but sustained weak performance could mean it's curtains for them. "That could in fact be a career-killer," she added.