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A Multi-Manager Approach to Better Return Consistency
MassMutual Select Mid Cap Growth Fund
Interview with: Joe Fallon

Author: Ticker Magazine
Last Update: Jul 24, 11:49 AM ET
Multi-manager funds offer diversity and flexibility that a single-manager fund may often lack. Joe Fallon, who highlights the advantages of the MassMutual Select Mid Cap Growth Fund, explains how the pairing of successful managers boosts the probability of consistency in returns and provides access to strategies that are generally not open to new investors.

ďThe fundís primary advantage is that it offers investors access to asset managers that might otherwise not be available to the public.Ē
We hire managers because they have a successful track record of adding excess returns. The last thing we want to do is to override their judgment by limiting their stock selections.

Q: How is the multi-manager approach beneficial?

A: We think the multi-manager approach is beneficial because it adds diversification and flexibility. While both T. Rowe Price and Frontier have similar investment strategies, as well as long-term performance histories, they have achieved their results using two different sets of ideas.

But both have been successful at managing assets using a conservative investment approach to the mid-cap growth market; and both have shown significantly strong peer ranking and excess returns over the benchmark.

Q: What mid-cap category does your portfolio fall within?

A: The fund would be considered as a core, mid-cap growth portfolio. It is certainly a growth fund; but its volatility is less than that of other mid-cap growth portfolios.

The companies included in the T. Rowe Price and Frontier portfolios are very similar. Both managers use a bottom-up fundamental approach in identifying secular growth companies with above average earnings growth and attractive valuations. Also, they both are looking for companies that generate good cash flow where the management teams are investing the cash for future growth.

Q: Would you give us an overview of the portfolio?

A: At the sector level, we are generally within plus-or-minus 10% of the Russell Mid-Cap Growth benchmark. That doesnít mean that we have predefined limits to benchmark weights. Depending on the attractive opportunities that our managers find, we could have a zero percent benchmark weight.

From a growth and valuation perspective, the managers donít need to own a certain percentage of various sectors like technology or consumer discretionary, which are 20% plus in the benchmark. In our fund, the managers are typically in the plus-or-minus 10% range for those sectors. Currently, we are running slightly overweight in technology due to some opportunities that the managers have seen in the last couple of years within the software space.

Conversely, we have been underweight consumer discretionary for the last five or six years. That has been due to the managers feeling that the benchmark weight has been too high. Russell reconstitutes their benchmark every year and the Russell consumer discretionary weight within the Russell Mid-Cap Growth jumped up to somewhere in the 25% range five years ago.

Since that time, our fund has been about 17% to 20% range which was an underweight position to that sector. Thatís not a top-down call, but certainly a bottoms-up stock-by-stock call by the individual managers. Those are just a couple of examples of some different areas where we have been over and underweight.

Regarding individual position limits, the maximum size of any one position is about 3% of the total portfolio. With about 200 names, we are broadly diversified with many small positions that reflect the independent strategies of our two managers.

Our cash position, which generally ranges from 4% to 5%, is a byproduct of the individual managerís buying decisions, rather than a market timing strategy.

Q: What are the risk guidelines for both of the investment managers?

A: Each manager has their own risk guidelines that they follow and we monitor them quarterly and annually. The guidelines are fairly standard and fall within plus-or-minus 10% of the benchmark weight.

Ultimately what we are looking for at the fund level is to maintain a tracking error relative to benchmark in the 4% to 5% range. We want to keep the expected risk levels below that of the overall benchmark and our peer groups, where the risk level is defined by standard deviation, beta and downside capture.

We expect the fund to capture less of the downside of the market and to participate in the upside relative to the benchmark and our peer groups. Fortunately, we have been able to maintain those characteristics over past market cycles.

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