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Fund Spy

Managers' Investment Secrets Revealed

So many funds, so many goose eggs.

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.

Ownership Levels for the Top 500 Funds
We've produced a PDF showing investment levels for every single Morningstar 500 fund manager. To see it, click here. (Note: We updated this PDF as of June 24. The first version of the PDF had some incorrect or out-of-date information on specific managers.) Later in the summer we will roll it out for all funds, so stay tuned.

How Ownership Is Disclosed 
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
Over $1 million

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

Managers Hate Their Own Cooking
When looking at the data (encompassing approximately 6,000 funds), the figures that jump off the page are those where no one invested a dime. In U.S.-stock funds, 46% report no manager ownership. And it gets worse from there. Fully 59% of foreign-stock funds have no ownership, 65% of taxable-bond funds have no ownership, 70% of balanced funds put up goose eggs, and 78% of muni 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 you live in, it doesn't make sense to own that fund as you won't benefit from the tax breaks. Second, managers who are citizens of foreign countries have a good excuse if their country bars investment in U.S.-domiciled funds.

A number of foreign-stock funds are run by foreign citizens and that may 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. With the two exceptions I spelled out, I can't think of why anyone should invest in a fund that its own manager doesn't invest in. True, higher investment 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.

Looking at Our Picks and Pans
We're not the only ones who have more conviction in our Fund Analyst Picks than our Fund Analyst Pans. Assuming the midpoint of each range, we found an average investment of $370,000 for our Fund Analyst Picks compared with $54,000 for our average pan.

That's a factor of nearly 7. If we exclude areas where managers have good excuses, such as target-date, single-state muni, and index funds, the average pick's investment pops up to $503,000. That illustrates the conviction we look for as well as the alignment of interests with shareholders'.

Is it an accident that managers are reluctant to invest in the pans, which suffer from some combination of high costs, poor strategy, shaky management, and disappointing stewardship? The median picks have an average of $239,000 and $247,000 invested by each manager. Conversely, the median pan has $0 invested.

Twenty-seven of our picks could claim that all of their managers have at least $1 million invested and 55 have at least one manager with more than $1 million.

Improving on the Ranges
The SEC can get kind of paternal for fund investors and that's certainly true of the way that manager ownership is disclosed. While stock owners get to see the precise number of shares that the CEO and other top managers at a company own, the SEC requires only these ranges.

When you consider that most investors own funds from one of the big fund companies, that $1 million range is awfully low. The typical manager at a big fund company is taking home well over $1 million a year. Like the Alternative Minimum Tax, this rule also fails to acknowledge inflation. That $1 million cap is going to get less meaningful each year.

Why not simply require fund companies to disclose the exact number of a manager's investment? Or failing that, the SEC could run a study to find out what the top decile of manager compensation is and make the upper band two times that. The bands are also weak at the low end. By investing $1, a manager makes it into the $1-$10,000 range, thus buying in at the low end just for appearance' sake.

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