A Trait of Great Investments

Great investors from Peter Lynch to Warren Buffett have shown a strong preference for businesses with high levels of insider ownership. Managers with a big stake in their own company, the thinking goes, will naturally make shareholder-friendly decisions because they're major shareholders themselves.

That same thinking applies to mutual funds. Shannon Zimmerman, head of the Motley Fool Champion Funds investing service, actively seeks out mutual fund managers who have skin in the game and their reputations on the line. Specifically, Shannon looks for funds where the manager has his own money invested and is also the founder and namesake of the firm.

Meet the masters
One fund that fits this mold is Thompson Plumb Growth (THPGX), run by John Thompson. He has the vast majority of his own money invested in his own funds. He's stuck his surname right up there, front and center. And -- no surprise here -- his fund is beating the market with a 10-year annualized return of 12.8%.

Notably, Thompson has been open to talking about his approach in detail. Along with nine other investing masters, he has outlined his stock-picking approach to Champion Funds members in a series of interviews with Zimmerman. (You can read all his interviews right now by taking a free trial of the service.) In one of my favorite quotes about the mutual fund industry, Thompson tells Shannon that one way to clean up the industry so that it truly serves its shareholders is simple: "Perform better."

Thompson certainly has. But to be fair, I've received a couple of e-mails about this fund's underperformance over the past year or two. Does this indicate that Thompson has lost his touch, or is the down period just a result of having a relatively compact (and thus volatile) portfolio? Because the fund's managers are sticking with their investing philosophy, it's easier to give them the benefit of the doubt. "I like managers who stick to their guns through lean times," Shannon says, "because that means they're able to snap up the kinds of companies they like on the cheap." So we'll keep an eye on performance, but for now the fund remains compelling.

The success of champions
In his classic work One Up on Wall Street, Peter Lynch wrote, "There is no better tip-off to the probable success of a stock than that people in the company are putting their own money into it." The same goes for funds. Before you sink your investment dollars into a fund, make sure the managers are heavily investing their own money in it.

If the managers gladly assume the reputation risk of putting their names front and center on the masthead of the fund, all the better. That shows that they're with you, are on your team, and are working hard for something far more valuable than high fees (the primary aim of far too many fund managers). When their interests are aligned with yours, they want high investment returns and have a better chance of making their shareholders rich for years.

Those are just two things Shannon looks for in a good fund. (Indeed, he found both qualities in Thompson Plumb Growth -- it was the August 2004 Fund of the Month.) You can read the buy reports of his more than 40 market-beating recommendations (and the "don't buy" reports on his dozen or so "Dud" funds) with a no-obligation 30-day free trial. Almost all of his picks, which are beating their benchmarks 18% versus 10% since the service began, have managers who "eat their own cooking." And several -- like John Thompson -- put their names and reputations on the line.

This article was originally published as "Great Reputations, Great Riches" on Jan. 9, 2006. It has been updated.

Of the companies mentioned in this article, Rex Moore owns shares of Berkshire Hathaway and eBay. eBay is a Stock Advisor recommendation. Pfizer is an Inside Value recommendation. The Motley Fool has adisclosure policy.