Is Your Fund Manager Eating Out Too Much?

Our friends at Morningstar.com recently reported some very interesting data about whether fund managers have invested much of their own money in their own funds. The reason why this matters is obvious: If the manager doesn't believe in himself or herself enough to park a big stake in the fund, then why should we? (The article also notes that there are a few reasonable reasons for low-to-no ownership, such as if a manager is a foreign citizen, prohibited from investing in U.S. securities. Or if the fund is focused on a niche, in which case one wouldn't expect it to be a major part of anyone's portfolio.)

So what did Morningstar find when it studied about 6,000 funds?

When looking at the data (encompassing approximately 6,000 funds), the figures that jump off the page are those where no one invested a dime. In U.S.-stock funds, 46% report no manager ownership. And it gets worse from there. Fully 59% of foreign-stock funds have no ownership, 65% of taxable-bond funds have no ownership, 70% of balanced funds put up goose eggs, and 78% of muni funds lack ownership.

Jeepers. But there's more: At least as Morningstar sees it, funds whose managers put their own money into the fund are more attractive in terms of future performance.

What to do
Fortunately, we can put this information to good use. The SEC now requires funds to disclose how much their managers own. So before you invest in a fund, look into that. For example, the Bridgeway fund family is known for its managers eating their own cooking

Know, though, that this metric isn't enough to qualify or disqualify a fund from your consideration. Ken Heebner, in the news recently for his CGM Focus (FUND: CGMFX) fund's stellar performance, recently had less than a million dollars in his terrific fund. Its top holdings recently included Nucor (NYSE: NUE), ArcelorMittal (NYSE: MT), Monsanto (NYSE: MON), and Alcoa (NYSE: AA).

Still, it's good that Heebner eats at least some of his own cooking. There's no better way to be sure your manager has as much at stake in a fund's success as you do.