It's widely known that having managers deeply invested in their own funds is good for their shareholders. There's nothing that focuses a manager's mind like the prospect of losing vast chunks of his or her own money. Also demonstrable, but less widely recognized, is the fact that having a fund's independent trustees deeply invested in the fund also substantially improves a fund's risk-return profile. It turns out that trustees don't
like losing money or paying taxes, so they become particularly aggressive when their fund managers engage in behaviors that lead to such outcomes.
A relatively new study puts two interesting twists on the old story. Martin and Sonnenburg find (1) that a substantial increase in the amount that a manager has invested correlates with about 1.6% higher alpha in the succeeding year. So far as I know, no public source releases information on changes in a manager's level of investment. And (2) the increased alpha occurs even when the investment just reflects a fund company's mandate. That is, finding #1 isn't necessarily about market timing or confidence. If a fund company requires substantial and ongoing investment by their managers, performance improves.
My preference, of course, is that every single employee of the adviser and every trustee have substantial skin in the game. As one manager put it, "it's one thing to be invested in your own fund. It's another to have your mother invested. And it's an entirely different level once your mother-in-law is investing with you."
David
Comments
"It's widely known that having managers deeply invested in their own funds is good for their shareholders. There's nothing that focuses a manager's mind like the prospect of losing vast chunks of his or her own money"
I wish this were the case with some of the Artisan funds I own.
Mona
"On a more positive note, all but two of the Artisan funds have at least one manager with more than $1 million invested in fund shares and eight have at least two managers who invest that heavily in their funds. That's the highest level of manager investment disclosed to the SEC and an industry best practice."
It does not name the two funds, but a call to the fund family might help identify them. especially if you send an email to the manager of the fund you are are interested in. You also might check in the Edgar database since it is publicly held.
No. I am saying they are invested in their funds, but are not performing well. ARTVX, ARTQX and ARTLX come to mind, ironically all on the value side.
Mona
At a quick glance, one of Yockey's assistant PMs has no investment in two of his four funds and another has fairly modest investments. One interesting question would be to ask whether Charles-Henri Hamker can easily invest in his funds. If he's not a U.S. citizen (he seems to be French), it'll be quite complicated.
Admittedly, though, I haven't yet had time to assemble the totals by fund since the SAI reports them by individual.
As ever,
David
"Manager Ownership of Fund Shares
Fund managers who invest in the funds they run demonstrate conviction in their investment process and align their own financial interests with fund shareholders'. Morningstar analyzes fund-share ownership trends to determine whether a firm's managers meet the industry's highest standards. For non-U.S. fund firms, Morningstar surveys fund companies to determine the extent to which their fund managers' ownership illustrates industry best practices.
For U.S. fund firms, where funds report their managers' ownership annually to the SEC in the Statement of Additional Information, Morningstar will consider the percentage of the firm's fund assets where at least one of the fund's managers invests in fund shares more than $1 million, the highest ownership level reported to the SEC.
In all analyses of fund-ownership trends, Morningstar excludes types of funds where manager ownership would be difficult or impossible, including funds used only in insurance products, wrap accounts, or retirement plans. Morningstar also excludes fund of funds from the analysis."
If memory serves per what the stewardship pages used to include (text and figures for each component of the grade), they've stopped putting much effort into them; a few funds I looked at had only a summary for the fund family, not the fund itself, showing only an A, B, C etc. for each component of the grade, but no rationale besides the sketchy info in the summary.
The newer version of fund analyst reports, though, does show management ownership (at least for some funds, and of course for only the limited number of funds they do reports on) under the "People" rating rationale.
The reports and stewardship grades are 'premium' products. Otherwise, it's off to the SAI for each fund you're interested in for the info (which are usually linked on M* under the Filings tab).
I want to see significant investment of persons net worth, relative to fund assets etc. For instance, last time I calculated Bruce Berkowitz reports $1M + of ownership of FAIRX, while actually owns like $42M of it. THAT's significant ownership.
So to answer the original question, when the manager REALLY feels your pain is when you can be that much confident unless something has fundamentally changed regarding why you bought the fund, you can hold on.
The rub is that the SEC does not require disclosure of a firm's policy, if any, and the SEC investment bands are badly out-of-date. The top band for fund directors is "over $100,000" and the top band for managers is "over $1,000,000." As stunning as I find the phrase "over $1,000,000," apparently large financial services firms compensate key personnel pretty generously. Who knew? For many, investments in the millions are routine and in the tens of millions are not unusual.
As ever,
David
If I'm buying a "mid cap value" fund not just in the name of the fund, but also the stated goal of the fund, I need the managers to own that fund in their equity portfolios for the corresponding sleeve of their portfolio. I don't care if manager is in his 20s and decides 100% of his equity portfolio can be in micro caps because it is appropriate for his age. If he is doing that, he is not focusing on "mid cap value" and if he has no ownership in the fund, THAT is a problem. The more he owns the better I feel. This is just common sense.
I also hear about managers turning 60/whatever and then because of their age they sell all their shares in the equity fund(s) they manage. Fine. Manager is not a bad person. However, WTF do I care? I need my manager focused on managing "mid cap value". So I will go and buy another fund where manager has ownership.
So there! If I have to bear tax consequences, I will do so. Maybe periodically sell a little and then roll it over to other fund. Whatever makes sense. Manager does not get to earn 1%/whatever on my assets if he does not have skin in the game. Period.
So once again, if someone knows I own a fund and realizes manager not holding shares of that fund anymore, please do tell me. You will be doing me a huge favor.