As Tom Gardner recently pointed out in "A 25-Bagger in Five Years," a high level of insider ownership is one of the key factors in a stock's success. It's a great way to find hard-working management whose interests are aligned with us, the individual shareholders. eBay (NASDAQ:EBAY), for example, is 17% owned by insiders, and Best Buy (NYSE:BBY) is at the 16% level.
Today, I'll reveal one of the top things I look for in mutual funds. Any guesses?
Win-win situation
Strong insider ownership makes sense for mutual funds and stocks. Show me a manager who has a lot of his wealth tied up in his own fund, and I'll show you someone who really cares about building long-term wealth for shareholders. This type of manager will:
- Work harder and more efficiently as he or she seeks to increase his own wealth.
- Use efficiency to help keep fees down.
- Be less likely to play the "window-dressing" game, in which managers, hoping to look smart, load up on hot stocks before the end of a quarter. These stocks will appear in the list of holdings, but of course the fund's shareholders didn't benefit from their gains during the quarter. This type of behavior is not only deceitful, but the buy-high, sell-low nature of it also dampens returns.
Eating their own
I think we can all agree that managers who "eat their own cooking" are often the most effective. And some of today's greatest fund executives support this line of thought. Shannon Zimmerman recently interviewed 10 managers he rates at the all-star level for his Motley Fool Champion Funds service. Here's what a couple of them had to say:
"Everybody here owns a part of the Greenspring Fund (GRSPX). It is certainly my largest investment, and I believe that is probably the case with most people here as well. We invest in the fund along with our shareholders and suffer through the bad times and enjoy the good along with everybody else."
-- Chip Carlson, Greenspring Fund, whose top holdings include Brooks Automation (NASDAQ:BRKS) 4.75% convertible bonds and Suncor Energy (NYSE:SU)
"I have my whole retirement package in [our] funds."
-- Neil Hennessy, Hennessy Focus 30 (HFTFX), whose top holdings include Express Scripts (NASDAQ:ESRX), CB Richard Ellis Group (NYSE:CBG), and Humana (NYSE:HUM)
And finally, one manager -- whom we can't name because his fund is an active Champion Funds recommendation -- told us, "We're invested in the fund. My child's education money is in the fund. More than half [of] my net worth is in the funds in our pension plan here, which is invested in the fund."
Now that is a manager I'd be comfortable having handle my money.
How to find them
High insider ownership is one of the top qualities Shannon seeks each month as he seeks out the best funds for his members. He's also looking for talented managers with good track records, sound strategies, and exceedingly low expense ratios. His recommended funds are beating the market and relevant benchmarks 22% to 11% since the service began almost two years ago.
He's currently offering 30 days free to any reader who wants to try out the service. It's a full-access pass -- with a complete list of recommendations and model portfolios -- and there's no obligation to subscribe. Click here for more information.
Rex Moore is beginning to lose hope for a Green Acres reunion show. At press time he owned eBay and no other companies mentioned in this article. eBay and Best Buy are Stock Advisor recommendations. The Motley Fool has adisclosure policy.
