Bill Gross and the dying breed of mutual fund superstars

Once stars like Fidelity's Peter Lynch, Legg Mason's Bill Miller and Pimco's Bill Gross were deified by investors. But many of the most popular products are index funds and ETFs that have no managers at all.

Celebrity sells. And it can sell mutual funds as well as it sells sneakers.

Bill Gross helped build Pacific Investment Management Co. into a $1.97-trillion firm by becoming a star. He cultivated his fame with a busy media schedule and colorful commentary on everything from Paris Hilton to the U.S. economy’s “new normal.”

When Mr. Gross abruptly left Pimco, the media frenzy highlighted just how rare his sort of celebrity is in the modern mutual fund industry. Hedge fund stars and private equity CEOs still get huge headlines, but not many mutual fund managers of the sort that average Americans can invest with. Once stars like Fidelity Investment’s Peter Lynch and Legg Mason Inc.’s Bill Miller were deified by investors. Now many of the most popular products are index funds and exchange-traded funds that have no managers at all. While the industry is far blander and more technocratic, that’s actually good news for individual investors.

Star managers can be great for marketing funds to small-time investors. Advisers like to invest in fund brands that their clients know, says Neil Pardasani, a partner at consulting firm BCG. Without a big name, he says, “it’s harder to put a face to the firm.” Investors often stick with these stars even when their performance is weak.

But making a fund manager into a star is a big risk. If the headline act has a bad year, the media notices. And if the star leaves, they can take assets with them, as bond baron Jeffrey Gundlach did when he left TCW Group and co-founded DoubleLine Capital. Up to 30% of Pimco’s assets could now leave the firm, Sanford Bernstein estimates. After this, “funds may think twice about building the brand around a single individual,” adviser Harold Evensky says.

The biggest firms, like Blackrock Inc. and Fidelity, now mostly do without big fund manager stars. That helps put the emphasis where it belongs — on performance.

Investors are learning to resist the charms of charismatic managers. Some investors still chase after top performers, which means they often end up with managers whose best days are behind them. But more investors know that a few years of big gains are as likely to be a fluke as a sign of genius, says Emory University finance professor Klaas Baks. That skepticism is helping push more assets into cheap passive funds, where an index is the manager. Passive investments’ share of all assets has doubled since 2003, BCG estimates, while the share in traditional active assets fell 29 percent. Index provider Vanguard Group hit $3 trillion in assets this month.

Mr. Gross’s $221-billion Pimco Total Return Fund Fund beat the Barclays U.S. Aggregate Bond index by 1.4 percentage points per year over the last decade, a feat that puts him in the top 5% of managers according to Morningstar Inc. That’s why Mr. Gross deserves to be a star, not because he’s an entertaining TV guest. And, luckily, investors are getting better at telling substance from celebrity.