Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Just as stock investors might keep an eye on insider buying and selling, so can fund investors glean some intelligence from what their managers are doing. Joining me to discuss this topic is Russ Kinnel. He is director of manager research for Morningstar.
Russ, thank you so much for being here.
Russ Kinnel: Good to be here.
Benz: So, Russ, let's discuss this data. It wasn't always available what fund managers own of their own funds. It is, though, in SEC filings. Let's discuss where investors can find this information.
Kinnel: That's right. The SEC requires that fund companies disclose how much managers invest in their funds. They have to just disclose that in ranges, not the absolute dollar amount, and it's disclosed once a year in the statement of additional information. They will show what each manager owns in the fund in those ranges.
Benz: So, why do you think this information can be a useful indicator for investors? They have a lot of data points to keep track of. Why should investors take a look at this?
Kinnel: Well, for a couple of reasons. One, I think, fund managers are the savviest investors in their own funds, right? They know their funds better than anyone else. And so, it makes sense that their investments would signal both their views of the fund but also their views of whether they are going to stick around in the investment in the fund. It shows alignment with investor interest. In other words, if the manager's got a big chunk of their own personal wealth in the fund then clearly they are aligning their interest more with fundholders whereas if instead maybe their main incentive is around their bonus for their fund or something else, then they could have different incentives. So there are a number of reasons.
And then finally, I have tested and found that there is some predictive power. There's not a lot of fund data points with predictive power. This isn't as proven as expense ratios, but it does seem that funds with higher manager investment levels are more likely to outperform than those with lower manager investment levels. And finally, a large chunk of funds the managers don't even have a penny in their own fund. So it seems pretty clear to me if I can choose between funds with no manager investment and those with high manager investment, I want the high manager investment.
Benz: Right. Now, are there some categories where we give managers a little bit of a pass on that front? Because I know that we look at this when we're doing the parent assessment which is part of the fund rating system. If the manager is running say, a target-date fund geared toward investors who are much younger than that manager is, do you factor that in at all?
Kinnel: Somewhat. So, in our parent rating, we look at across the board firm investment in the funds because that's a great indicator of whether the firm has buy-in. There we don't really cut much slack because you don't want to go through 200 Vanguard funds and look at every little detail. But when you're looking at an individual fund, we definitely do. We look at the manager's age, how many funds they run. Obviously, for instance, let's say, you have an index fund manager. They might not be paid as well as an active manager, and they might be running 10 funds. So maybe it's not that important, and so we take those into account. Or if say, it's a single state muni fund, obviously if you are managing a single state muni fund for the state of New Jersey but you're living in California, it's understandable why you wouldn't own that. So, we look at those details when we analyze the fund, but by and large you should expect your manager to invest the significant sum of their money in their funds or else, why would you?
Benz: So, one thing before we get started and we are going to talk about some specific funds where managers have been buying their own funds and selling them. You mentioned that when you look through some of these SEC filings that the data here is a little bit sloppier than some other data points that might come in SEC filings. You've called fund companies and found discrepancies. So, I think you want to make the point that investors should proceed with caution on this front.
Kinnel: That's right. For some reason, this is a data point that fund companies don't pay much attention to. So, if you think about expense ratios, holdings, a lot of those things, the fund companies go over that with a fine-toothed comb, their auditors go over it. So, those very, very rarely have a mistake in them. But for some reason this form of disclosure is rife with errors. I regularly find errors. I'll call the fund company and say, so why did this fund manager sell all their shares? They'll say, oops, we didn't notice that. And so, it is an area where they are a little sloppier unfortunately. Even so, we still found some predictive values. So, I think it's usually right but you do have to take it with a grain of salt. I would also add that currently you have to look in the SEC filing, but we are bringing these to Morningstar.com data pages soon. So soon these will be a lot easier to find.
Benz: OK. Good news. So, let's get into some of the funds that you highlighted in the most recent issue of FundInvestor where managers have been buying their shares. Let's start with TCW Total Return. Tad Rivelle has been a purchaser of that core bond fund. Let's talk about that.
Kinnel: This is a fund that famously changed hands from MetWest--or from Jeffrey Gundlach in the TCW team to the MetWest team when Gundlach and TCW had their big divorce. So, they've been running it for about three, four years now. Tad Rivelle has gone from zero dollars to over $1 million invested in the fund, and I certainly think that's a good sign when you see a manager showing further commitment to a fund. This is a fund we like. We rate it Bronze.
Benz: Another fund you highlight is BBH Global Core Select. Let's talk about that one.
Kinnel: Yeah. This is a fund that's pretty new. It's only got about a three-year track record, but it was encouraging to see that Timothy Hartch now is over $1 million invested in this fund, similar to his domestic fund BBH Core Select. So, it's a similar strategy, only on a global scale as opposed to U.S. We don't rate it yet, but I'm encouraged to see this significant commitment.
Benz: Is that something that you like to see if it's a new fund where you see that manager step up and put his or her own assets in it right out of the box?
Kinnel: Definitely. It tells me that this isn't a trend-chasing fund. They are not looking to just throw some funds out there and see what sticks. This is clearly something they view as a core investment that to see that level of commitment I think is a really good sign. I've seen other times when a fund might be launched that's kind of gimmicky and sure enough the manager doesn't invest in the fund.
Benz: Is it perhaps also a signal that the manager is finding good opportunities in the space where the new fund is launching?
Kinnel: Certainly. I think sometimes fund companies launch funds because it's a hot space and they just want to capitalize. Sometimes it's because that's actually where their investments are leading them. So I think that is a positive sign here.
Benz: The last fund is a fixed-income fund, Fidelity Strategic Income. Ford O'Neil has been a big buyer there recently according to the data.
Kinnel: That's right. He went from the $10,000 to $50,000 range to over $1 million which is obviously a good sign. This is a somewhat aggressive fund. They've got junk bonds, foreign bonds, and kind of a wide variety of bonds that have decent income. So, I take it as a positive sign that he is committing a lot to a somewhat risky strategy.
Benz: OK. Russ, interesting research. Thank you so much for being here to discuss it with us.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.