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Managers' Investment Secrets Revealed

Few mutual fund managers have significant ownership stakes in their own funds.

Russel Kinnel and David Kathman, 11/03/2008

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A key piece of the mutual fund puzzle has fallen into place.

A couple of years ago, the SEC started requiring that fund companies disclose how much each fund manager invested in his or her fund. Morningstar has gathered manager ownership information about each and every U.S.-run mutual fund in its database. The data allow us to take a more comprehensive look at how much managers invest in their funds in different asset classes. This gives us a benchmark for judging whether managers have greater conviction in their funds than their peers.

The disclosure rules say that managers must disclose ownership in the following ranges: $0, $1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001-$500,000, $500,001-$1 million, and more than $1 million.

Each manager working on a fund must disclose his or her investment, so there are multiple investment amounts for every fund with more than one manager.

So Many Funds, So Many Goose Eggs
When looking at the data (encompassing approximately 6,000 funds), the figures that jump off the page are those that show no management ownership. Forty-seven percent of U.S.-stock funds report no manager ownership. It gets worse from there. Fully 61% of foreign-stock funds have no ownership, 66% of taxable-bond funds have no ownership, 71% of balanced funds put up goose eggs, and 80% of municipal-bond funds lack ownership.

There are really only two excuses for not owning a fund you run. First, if you run a single-state municipal-bond fund for a state other than the one in which you live, it doesn't make sense to own that fund, because you won't benefit from the tax breaks. Second, managers who are citizens of foreign countries might be barred by their country from investing in U.S.-domiciled funds. A number of foreign-stock funds are run by foreign citizens, which might account for the ownership difference between U.S.-stock funds and international-stock funds. For managers who run niche funds or run a lot of funds, there's good reason for them to be at the lower end of the ranges, but not at zero.

The number of managers showing no faith in their process is staggering. Unless a manager can make one of the cases I mentioned above, I can't think of why anyone should invest in a fund that its own manager doesn't invest in. True, high ownership levels aren't a guarantee of success or an ethical manager, but at least they show that managers believe in the funds and they pay some of the costs and taxes that the rest of shareholders do.

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