Teams or Stars? A Study of Organizational Change in the Mutual Fund Industry

Dimo Ringov

INSEAD

dimo.ringov@insead.edu

 The mutual fund industry is the world's largest financial intermediary. Managing assets in excess of $22 trillion - almost double the size of the U.S. GDP - it dwarfs by an order of magnitude the hedge fund or private equity industries. The U.S. mutual fund market, with $10.4 trillion in assets under management as of year-end 2006, remains the largest in the world, accounting for nearly half of the world total.  

For decades the dominant form of mutual fund organization in the U.S. has been the single-manager fund where a sole portfolio manager, the “star”, makes all investment decisions. The era of the star manager may, however, be coming to an end. Teams, as opposed to individual stars, are now in charge of nearly 70 percent of all actively managed funds. The causes and performance consequences of this profound shift away from the “star” manager model toward team management, which took place over the 1990s and early 2000s, remain imperfectly understood. Practitioners cite many, often contradictory, rationales to justify or explain it. Students of strategy, finance and organization are only beginning to realize the significance and potential of this dynamic puzzle.

The organizational evolution of the mutual fund industry is a fascinating setting in which to explore a number of issues of long-standing interest to strategy and organization scholars. In particular, the rise and fall of the “star” model of mutual fund organization provides novel insights and evidence on the determinants of organizational structure, the active role of demand in industry evolution, the co-evolution of industry submarkets and organizational structure, the role of star knowledge workers and organizational design in creating and sustaining competitive advantage in professional service firms, the development of replicable and scalable organizational forms, as well as the portability of firm performance.

From an international perspective, it is also puzzling why and how the dominant form of mutual fund organization differs across countries. Fund management by teams is dominant in some countries (e.g. U.S., Singapore, Hong Kong), while the star manager system is the norm in other (e.g. France, Sweden, Portugal). In yet other markets, such as the UK, the “cult of the star manager” is still prevalent but weakening rapidly as team management is becoming increasingly widespread (Deloitte & Touche LLP, 2005).  We may be at the dawn of a sequence of organizational transformations around the world in a move away from stars and toward teams mirroring the shift which took place in the United States over the last decade.

Our limited understanding of the phenomena and issues at hand is particularly worrisome considering how much is at stake. In this presentation I provide a number of conjectures and rich empirical evidence about the possible causes and performance consequences of the rise of teams in investment management as well as discuss how they shed new light on core issues of strategy and organization in professional service firms.