An innovative team approach to selecting stocks for mutual funds has dramatically improved performance at Wachovia Corp.'s asset management unit in recent years.
Timothy L. Swanson, a senior vice president at Wachovia Asset Management and the team system's architect, said the idea to create sector-specific teams came to him after he looked at other service industries and saw that a focus on teams instead of tiers produced better results.
After the Winston-Salem, N.C., company's core equity product, the Wachovia Equity Fund, underperformed the Standard & Poor's 500 by 250 basis points and placed in the 74th percentile in Morningstar Inc.'s 1997 performance rankings for all funds, Mr. Swanson decided to create the sector team system. "We found there was just too much information for one manager to get his mind around," he said.
Wachovia is the only banking company, and probably the only asset manager, taking a multiteam approach to asset management, according to industry observers.
In the traditional process of picking stocks for mutual fund portfolios, an analyst researches them and makes his or her recommendations to the portfolio manager. "A specialized analyst had to sell a particular portfolio manager on an idea, and a lot of good ideas tended to slip though the cracks," said Kenneth J. Bolich, a portfolio manager and analyst on the technology sector team.
In Wachovia's sector team system, instituted in mid-1998, six teams comprising a senior manager and two or three junior analysts research and select the best stocks for a fund. The analysts on each team specialize in a specific sector.
This lets teams look at the big picture in the sector, Mr. Bolich said. "Now, our ideas are spread across to all of the [sector's] portfolios, and we can move on an idea right away."
Because buying decisions are made by the teams, "a decision that once took weeks can now be done in hours," he said.
Since the system was introduced, the Wachovia Equity Fund has outperformed the S&P 500 by 500 basis points. Last year it returned 1.72%, compared with the minus-11.93% return bank funds averaged that year (and the minus-14.24% return funds overall averaged), according to Morningstar. It placed in the 19th percentile in Morningstar's overall fund rankings.
One-fourth of Wachovia's $40 billion of assets under management is now handled by sector teams.
Mr. Swanson said the team approach "has performed well in both the bull market of 1999 and the bear market of 2000."
The team approach has worked in the technology sector regardless of market conditions. In 1999, when technology stocks were skyrocketing, the fund returned 26.15%, placing it in Morningstar's 21st percentile. In 2000's volatile market, the fund's ranking remained steady.
"It's as if we have six different funds," Mr. Swanson said. "Over time, each team plays a hot hand."
The banking company said it is excited about the future of its team structure. In December, it launched two products, the Wachovia New Horizons Fund and the Blue Chip Value Fund, both managed by sector teams.
Other companies are weighing similar approaches. First American has since the middle of last year been considering forming teams of its analysts and portfolio managers, said Catherine Coult, a spokeswoman for U.S. Bancorp's First American Funds.
Burton Greenwald, a Philadelphia mutual fund consultant, said the team approach would eventually offer the quickest path to new ideas and hot companies but could alienate senior portfolio managers accustomed to autonomy in running their funds.
Mr. Swanson said Wachovia had expected many of its senior portfolio managers to leave the company but that a mass exodus never occurred. With the team structure now in place, the bank can weather departures, he said.
"We now have two or three people working together on an equal plane, so if one leaves, you have people to handle a transition," he said.
