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."
Comments
Of all the stupid regulations...managers should be made to disclose EXACT amount of their holdings and NOT ranges.
Every now and again I discover manager of fund I own does not own a single penny. That's either because when I bought fund I was having a personal moment and didn't read the SAI properly, OR in some cases, when I bought fund, SAI showed investment, but a year later IT's GONE. The latter has actually happened to me a few times and THAT is most shameful. Clearly manager trying to hoodwink investors into buying letting them think he is committed. Even worse when the manager is celebrated one.
How does one go about finding out which are the two Funds?
Mona
Mr. Yockey has over $1M in four of his funds.
The Longleaf Partners Funds has a policy that does not allow employees to have outside investments. The portfolio managers and analysts must have 100% of their investments in the Longleaf funds. I'd like to see that in other fund companies as more common.
Another issue: Just because a manager has $500K or even $1M in his fund, it doesn't mean he is that committed. Many of them have investable assets in the stratosphere, and even $1M may not demonstrate a great deal of commitment.
I own some Berkshire Hathaway B shares, and am very happy that Warren Buffett has close to 95-100% of his net worth in the stock. A full commitment.
I'd like to see some mutual fund managers who have their entire life savings in their funds.
In this respect, Bruce Berkowitz sets a fine example.