Some managers have boosted their investment in their funds. I name names.
This article was published in the September 2016 issue of FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.
Fund managers are savvy investors, so why not follow their lead?
U.S. mutual funds are required to disclose how much money their managers have invested in their own funds. Each year, funds file a Statement of Additional Information that lists ownership levels in bands that range from zero to more than $1 million. As of August 2016, 1,036 funds had at least one manager who invested more than $1 million of their own money in their funds. On the flip side, 3,822 funds had no investment from any of their managers.
The managers know something about their funds, and it is fair to assume their investment is a useful signal. In fact, I’ve found manager ownership to be one of the better predictors of future performance, though not as good as expense ratios. Manager ownership is a good indicator, but, as with fees, it alone is not sufficient to lead me to buy a fund. I still want to know all the fundamentals and how the fund serves my portfolio.
The group of funds run by managers investing no money in their funds had a meager 35% success rate over the ensuing five years, those with between $100,001 and $500,000 had a 43% success rate, and those with more than $1 million had a 47% success rate. Because about one third of funds were merged away or liquidated over that five-year stretch, a 47% success rate is actually quite good. If we look at a risk-adjusted success rate, the story is fairly similar. We found a risk-adjusted success rate of 28% for managers with no investment compared with 39% for those with $1 million or more.
Looking at asset classes, the trend was pretty consistent. In U.S. equities, funds with no investment had a dismal 29% success rate versus 39% for the top rung. Coming out of the bear market, attrition was higher in U.S. equities than in other asset groups. For international funds, those with zero investment had a 32% success rate versus 68% for those with more than $1 million invested. Balanced funds had a 32% success rate on the bottom rung versus 85% on the top rung.
I’ve gathered ownership data on the Morningstar 500 funds. Let’s take a look at managers who have moved into the top tiers of ownership. (We will be adding this information to Morningstar.com shortly.)
Tad Rivelle TCW Total Return Bond TGLMX
Manager Tad Rivelle took his investment at this fund from zero to more than $1 million. It’s a welcome sign for this fund, which has a Morningstar Analyst Rating of Bronze. Comanagers Mitchell Flack and Bryan Whalen have between $100,000 to $500,000 and $10,000 to $50,000 invested in the fund, respectively. The trio took over the fund in the wake of Jeffrey Gundlach’s bitter divorce from TCW about six years ago.