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More Evidence Supports Manager Ownership

The latest Morningstar study shows that funds with manager-owners have outperformed.

David Kathman, 01/11/2011

When it comes to renting versus owning, conventional wisdom holds owners in higher regard. Condominium associations often prohibit owners from renting out their units, presumably because owners care for their condos better than renters. Many drivers put their rental cars through paces that they wouldn't dare with the family sedan. And countless rock bands have trashed hotel rooms during here-today-gone-tomorrow tours.

Morningstar has wondered whether that pro-owner conventional wisdom holds for mutual funds. It stands to reason that managers who invest in the funds they run show conviction in their strategies and are more likely to act in the long-term interests of shareholders. In a new study of manager ownership data, we've found support for this idea--core stock and bond funds whose managers have skin in the game have outperformed those whose managers don't invest in their funds.

Crunching the Numbers, Again
Morningstar has been studying whether managers invest in their funds since 2004 when we first rolled out our Stewardship Grades for mutual funds. At first we had to rely on fund companies to disclose this information voluntarily, but since 2005 the SEC has required all funds to disclose manager ownership of fund shares in their annual Statements of Additional Information in seven ranges: zero; $1 to $10,000; $10,000 to $50,000; $50,000 to $100,000; $100,000 to $500,000; $500,000 to $1 million; and more than $1 million.

This manager-ownership disclosure has provided a wealth of information, but making sense of it all is not an easy task. Back in 2008, Russ Kinnel, Morningstar's director of mutual fund research, took a preliminary look at the data, finding that a large percentage of managers had no reported investment in their funds and that the average manager investment in Morningstar's Fund Analyst Picks was much higher than in the Fund Analyst Pans. In a 2009 study for Morningstar FundInvestor, Morningstar found that funds with substantial manager ownership ($1 million or more) had significantly better five-year returns relative to their categories than funds with no manager ownership.

In the latest study, Morningstar took the most recent fund manager ownership data and looked at how it correlates to various other data points. This time we focused on core fund categories, excluding sector funds and similarly nondiversified groups.

Who Has Skin in the Game?
Back in 2008, 46% of U.S. stock funds and 65% of taxable-bond funds reported no manager ownership. The 2010 results were very similar, with 45% of core stock funds and 66% of core bond funds having no manager ownership. However, things look a little better if we measure the percentage of fund assets with manager ownership, rather than the number of funds. The following pie charts show the amount of total assets in each ownership range for core stock and core bond funds. For simplicity's sake, the seven bands are consolidated into four: zero; $1 to $100,000; $100,000 to $1 million; and more than $1 million.

While 45% of core stock funds have no manager investment, only 23% of core stock fund assets are in funds with no manager investment. And while only 13% of core stock funds have at least one manager with $1 million invested, 47% of core stock fund assets are in such funds. This reflects the fact that lots of small funds don't report any manager investment, while many of the biggest funds, such as American Funds Growth Fund of America AGTHX, have managers with substantial skin in the game.

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