Fund Managers Who Invest Elsewhere: Eating Your Own Cooking

FYI: Copy & Paste 7/12/14: Sarah Max: WSJ
Regards,
Ted
Just 900 fund managers out of nearly 8,000 funds have more than $1 million invested in their own portfolios. What does that mean for you?

Active mutual fund managers talk up the importance of insider ownership for the stocks they buy. It's a vote of confidence, they say, when CEOs put their own net worth on the line.

It stands to reason, then, that mutual fund investors would ask the same of their managers. "It's a positive indicator when managers invest in their own funds," says Stan Mavromates, Americas chief investment officer at Mercer. "It shows real conviction in the stocks and bonds that they're picking."

Since 2005, the Securities and Exchange Commission has required annual disclosure of manager ownership in a fund's statement of additional information. The numbers are given in ranges, from $1 to $10,000 on the low end, to more than $1 million at the top, and they're easy to pull up using Morningstar's FundSpy tool.

The results are shocking. Of the 7,700 funds tracked by Morningstar, nearly half are run by managers who don't have a single penny in their own funds. There are valid reasons to give some managers a pass -- managers of target-date funds or single-state muni bond funds, for example. It's also reasonable for managers of sector funds or niche strategies to have somewhat smaller stakes.

Zero ownership, however, should give investors pause, says Russel Kinnel, Morningstar's director of mutual fund research. And that's what some 35% of U.S. stock funds have, according to Morningstar data. "I can't imagine having 35% of my portfolio invested in companies whose CEOs don't own any stock in their company," says Chris Davis, head of the employee-owned Davis Advisors. All five stock Davis funds have more than $1 million of manager money invested.

WHILE A GOOD DEAL OF RESEARCH has been devoted to the relationship between stock performance and insider ownership, little has been done on the relationship between ownership and performance in the fund world. "We're just starting to test the predictive power of management," says Kinnel. In a 2008 analysis, he found that managers of funds recommended by Morningstar had, on average, $354,000 invested in their own funds. The average stake for managers of funds panned by Morningstar: $52,000.

Fund companies, for their part, don't require managers to own their own funds, but most encourage it. Fidelity says that more than two-thirds of actively managed public funds are run by managers with at least $1 million invested in those portfolios. At Janus, managers are prohibited from owning individual stocks, and incentive pay -- roughly a third of total compensation -- goes straight into the funds they run, to be vested over four years. Managers have the option of reallocating to other funds, but most stay put. "I've never sold a share of the funds I've managed," says Jonathan Coleman, who has more than $1 million in the Janus Triton (JANIX) and Janus Venture funds (JAVTX).

High levels of ownership are particularly common -- and especially important -- at boutique firms, which often offer more "high conviction" funds. The more a manager touts his stock-picking, the more of his money should be in the fund. All but two of the 14 funds at Artisan Funds, for instance, are run by managers who have at least a million bucks in their portfolios. "Everyone here has the feeling that it is their business," says Dan O'Keefe, co-manager of Artisan International Value (ARTKX) and Artisan Global Value (ARTGX).

All told, just 910 funds have at least one manager with a seven-figure stake -- shameful, especially for large-company fund managers. Says Kinnel: "A million dollars isn't that big a hurdle for most managers."