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Traders and financial professionals work on the floor of the New York Stock Exchange.
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When it comes to money-managing, three is better than one.
“Teams do better than single-managed funds,” Michael Mauboussin, director of research at BlueMountain Capital Management, said at the Project Punch Card Conference in New York City on Wednesday. “The best team size is three. The next best is five.”
Funds managed by three-person teams tend to outperform solo-run funds by 58 basis points a year, beating any other team size, according to Mauboussin. Although the effect is small, it’s statistically significant that teams are better at managing money, Mauboussin noted.
In the mutual fund universe, those listing a single manager are hard to come by these days. Seventy-five percent of all actively managed funds are team-managed, and only 25% are run by a single manager, according to a recent Morningstar study.
In 1992, 67% of U.S. stock funds were run by a single manager, according to Morningstar data. Back in the day, many funds were built around legendary investing personalities like Peter Lynch who managed Fidelity’s Magellan Fund and John Neff, who ran the Vanguard Windsor Fund.
Figuring out the appropriate size for a team is crucial, Mauboussin said. It’s inevitably less productive when the team gets too big due to reduced motivation and elevated costs of coordination, he noted.
“The idea that more people tend to be better — more experience, more training, different points of view, and that’s to a large degree offset by coordination costs — getting people physically together,” Mauboussin said. “Smaller is better than bigger. Three would be preferable than seven.”
Furthermore, people should go beyond the typical social category diversity when creating a team, Mauboussin said. Social category diversity reflects differences in race, ethnicity, gender, age, etc. Cognitive diversity includes differences in education, training, experience, expertise and personality, which is key to problem solving, Mauboussin said.
Before joining BlueMountain, Mauboussin was the head of global financial strategies at Credit Suisse and chief investment strategist at Legg Mason Capital Management. Mauboussin has been an adjunct professor of finance at Columbia Business School since 1993.