New Morningstar study reveals who eats their own cooking, and who doesn't.
This article originally appeared in Morningstar FundInvestor, an award-winning newsletter that presents investment strategies and tracks 500 funds.
After the bear market and the fund scandal, we heard from lots of fund companies about their great turnarounds. We're told they have a new philosophy, have renewed commitment to their roles as fiduciaries, and that everyone there is buying in to the changes. But are they really?
Now that all the data on manager ownership is available in mutual funds' Statements of Additional Information (SEC form 485BPOS), we can get a better handle on which managers really are buying their own funds and which are just giving lip service to the idea of their funds' merits. Likewise, some portfolio managers have told us they prefer to invest in lower-fee separate accounts or buy shares directly instead of investing in their own mutual funds.
Because no one is better placed to assess the investment merits of a mutual fund than its manager, the information is an excellent tip about whether you should invest. The picture is dramatic. Some managers put large portions of their personal wealth alongside fund investors, while others invest a mere pittance, considering that most portfolio managers at large fund companies are clearing more than $1 million a year in compensation. In the scandal that enveloped Putnam, it emerged that one of the managers who was timing his own funds was making around $14 million a year in compensation.
And the excuses continue to roll in, too. Over the past year, as fund companies were forced to fess up that their managers hadn't actually invested much in the funds they run, we heard some real doozies. One said, "Our managers live in New York, and that's really expensive, so they don't have much money left for their mutual funds." Another firm told us that its managers prefer to invest in separate accounts because they were so much cheaper than the firm's mutual funds (points for honesty, at least).
But my favorite was from the fund company that explained investing in its own funds was a hassle and that "it's really easier just to buy Vanguard." Maybe it's a coincidence, but all three of the above firms have high expense ratios.
How We Ran the Study
Now that all of the filings are in, we can aggregate the data to paint a picture of how managers throughout various firms view their funds. However, there is one challenge in examining the data. The SEC requires only that managers
state their investments in specified ranges: $0; $1 to $10,000; $10,001 to $50,000; $50,001 to $100,000; $100,001 to $500,000; $500,001 to $1 million; and more than $1 million.
Because we don't have the exact figures, I generously chose the midpoint of each range when estimating a manager's ownership. (I say "generously" because managers have an incentive to own just enough shares to clear the lower thresholds of the SEC ranges.) For example, if a manager had invested in the $50,001 to $100,000 range, I counted his investment as $75,000. For more than $1 million, I rounded up to $1.1 million. I used the lead manager's investment figures if the SAI spelled out who that was. If it did not and there were multiple managers, I averaged the midpoints. I then added them up.