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Fund Managers Not Investing In Own Mutual Funds

If I were invested in a mutual fund, I would feel comfortable knowing that the fund manager had a stake in it. MarketWatch’s Chuck Jaffe discovered that this isn’t the case on many occasions. He wrote Monday:

Alas, all too often it’s not and the fund managers don’t have enough belief in what they are doing to actually live by it.

That’s the conclusion to be drawn from a new Morningstar Inc. study which looks at how much managers invest in their own funds… In 46% of the domestic stock funds surveyed, the manager hadn’t invested a dime. Other asset classes were far worse with nearly 60% of foreign stock funds reporting no manager ownership, two-thirds of taxable bond funds having no managers with money in the fund, up to 70% of balanced funds having no manager cash and some 78% of muni bond funds having shareholder cash only.

Ouch. That’s a lot of managers who are going out to eat, rather than eating their own cooking.

Scene From “Blues Brothers” (1980)

It gets worse. Jaffe pointed out:

…if they believe in the product, an investment of no cents makes no sense, especially when the lowest level for disclosure is $1 to $10,000, meaning managers can get credit for 10 grand by simply dropping a buck in their own funds.

Russel Kinnel, director of mutual fund research for Morningstar, told MarketWatch that he believes there’s a direct correlation between investing in a fund and performance. For example, in Morningstar’s fund analysts’ “picks,” the average investment by managers was $370,000, compared with $54,000 for the average analysts’ “pan.” Kinnel noted:

The median picks have an average of $239,000 and $247,000 invested by each manager. Conversely, the median pan has $0 invested.

The Morningstar director offered some great advice to prospective mutual fund investors. Jaffe wrote:

Kinnel said in an interview that manager ownership stakes would not be the first thing to look at in deciding which funds to buy, “but it’s a pretty good indicator of which companies are into stewardship more than salesmanship… If you’re wavering on a fund right now, wondering if you should stick around, and you check and find out that the management is not suffering right along with you, I think you have good reason to be concerned. Those managers are collecting their paycheck, but have decided they are better off investing it somewhere else… and maybe you’d be better off doing that too.”

Source:

“No skin in the game”
Chuck Jaffe
MarketWatch, July 6, 2008