Does Manager Ownership Indicate Good Performance?

Christine Benz: Hi, I'm Christine Benz for Morningstar. Does whether a fund manager has a heavy ownership stake in his or her fund say anything about its prospects? Joining me to discuss that topic is Russ Kinnel. He's director of manager research for Morningstar. Russ, thank you so much for being here.

Russ Kinnel: Happy to be here.

Benz: Russ, in the latest issue of Morningstar FundInvestor, you talked about manager ownership. Let's just start with a really basic question. Is it predictive? Is it connected with performance in any way?

Kinnel: Yeah, the indication does seem to be that there is some link. When I've tested it, I found it to be the second-best predictor of performance. Obviously, fees are the most predictive. And I'd like to see more studies to really say conclusively that it is, but certainly, the indications are that it does have some predictive value.

Benz: If you want to look up whether your fund manager eats his or her own cooking, where can investors find this data?

Kinnel: You can find it on the People tab for a fund's data pages on Morningstar.com. You can also find it using the Fund Spy Selector tool on the FundInvestor website, or you can go to the actual SEC filings. The SAIs have the annual filing on the manager investment levels.

Benz: When you look at manager ownership across the whole universe of mutual funds, how do you find that managers do in this respect? Do they tend to own their own funds to a pretty good extent?

Kinnel: Well, it's really a mixed bag. Over 1,000 of the 7,000-plus out there, you find managers invest more than a million dollars. I should note that fund managers are required to report these in bands, going from zero to over a million, with the million being a top band. And so, from one perspective, you could say, "OK, a good chunk of those managers own a meaningful investment in their funds. So, that's great. On the other hand, 1,000s have zero in their funds." So, it's really a mixed bag. And it certainly, I think, illustrates that some fund managers really believe in their funds a lot more than some others do.

Benz: And one thing you note in the article is that this information isn't as telling as perhaps it could be. Let's discuss that. You note that these are really highly paid individuals. So even a million dollars, even though it's a ton of money, might not be a lot to some of these people, right?

Kinnel: That's right. Many fund managers who run sizable funds and pick fund companies--they may be making eight figures. Now I suspect a lot of these managers, with more than a million, it actually is a big chunk of their liquid net worth. But at the same time, we don't know for certain, and because it's capped out at a million--this rule was set up about 15 years ago, but even then, I think it was kind of a limiting number, so--it's not as good as it could be. If they just disclosed number of shares or actual dollar values, it would be an even more useful data point.

Benz: One thing you looked at in the article was looking at some sort of niche categories, categories where one might not typically have a huge investment. So, outside of large-cap blend and intermediate-term bond, you looked at some categories where investors tend not to own them in size. And if a manager has a big stake, you think that that's more interesting and potentially more noteworthy. Let's talk about one of those categories you looked at: short-term bond. What did you find there in terms of manager ownership?

Kinnel: It's really a small percentage of managers who own their short-term bond funds in over a million dollars. And you can understand why, right? A short-term bond fund is ideally, like, maybe 5% or so of your portfolio, maybe 10% if you've got a big purchase coming up. But I understand why a manager wouldn't have a million dollars or more in their fund. So, it's about 15% of short-term bond managers cross that threshold, which is OK, but it's a small group that really has that commitment.

Benz: Within that subgroup of short-term bond funds where managers do have heavy ownership, are there any funds that we like? Any medalists there?

Kinnel: Yeah, there are three that stood out to me. Robert Galusza, who manages the Silver-rated Fidelity Short-Term Bond FSHBX fund [now Bronze], has more than a million dollars of his own money in the fund. Tom Atteberry, who runs Bronze-rated FPA New Income FPNIX, has more than a million dollars in his own fund. And at Baird Short-Term Bond BSBIX, which we rate Gold, Mary Ellen Stanek and Warren Pierson both have more than a million dollars in the fund. I really love seeing that commitment to something that's kind of a niche, and so for them to really step up, I think, shows that they're committed to their funds. They believe in their funds.

Benz: Another fund that you flagged is Vanguard Energy. You noted that it's not super-typical for managers of sector funds to have heavy ownership. Here's one, though, where we do see significant manager ownership in that sector-specific fund.

Kinnel: That's right. There are 20 energy funds, but only one is run by a manager who has more than a million dollars invested. And that's at Vanguard Energy VGENX, where G. Thomas Levering of Wellington, runs the fund, and he's got more than a million dollars. And of course, the fund, like every other energy fund, is in the red, and it's been a rough few years for it. But I think if you do own that fund, certainly you have to appreciate that the manager is there with you and believes in it. We rate the fund Bronze.

Benz: Russ, really interesting research on the value of managers who invest in what they manage. Thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.