What do your mutual fund managers eat? The answer to that question can help you assess the attractiveness of various funds. I'm not referring to preferences for Krispy Kreme doughnuts over Brussels sprouts (though that, too, might not bode well for long-term performance). Instead, I'm referring to the fund's home cooking.
Mutual fund managers have money of their own to invest. And where they invest it can reveal a lot. If they invest heavily in their own fund (which you might think of as "eating their own cooking"), that's a promising sign: They must have some confidence in its growth prospects. If they don't, that raises a critical and troubling question: Why not?
In a recent commentary, Roy Weitz of FundAlarm.com addressed this issue, noting new regulations that will require money managers to disclose how much they have invested in their own funds (beginning Feb. 28). This new rule is good for investors.
Weitz summarized some findings from a look at Putnam's five largest funds (Putnam has been making public its managers' ownership levels for a while now). At the Putnam Fund for Growth and Income
Of course, one useful bit of information isn't included in these disclosures -- the managers' total assets. If we knew that a manager was worth $3 million and had just $100,000 invested in his fund, we might rightly be more concerned than we'd be about a manager worth $1 million with $100,000 invested. It's safe to say that most fund managers with at least several years of tenure have been compensated fairly well and should be worth more than the average American -- but new managers may not yet have built up considerable wealth. Still, it doesn't look good when some managers have nothing at all invested in funds through which they're ostensibly building wealth for customers to the best of their abilities, by selecting the most promising investments they find.
Fortunately, there are many great funds out there and many managements that solely eat their own cooking, such as the Longleaf fund family, which runs the well-respected Longleaf PartnersFund
If you're looking for some of the outstanding mutual funds out there, many of which feature managers eating their own cooking, grab a free sample of our Champion Funds newsletter, which recommends and profiles at least two funds per month. In one sample issue, you'll also see all the past picks listed.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.