Managers Prefer Gold-Rated Funds
Manager investment levels track our Analyst Ratings.
Manager investment levels track our Analyst Ratings.
Today we are launching a new article series titled Fund Spy: Morningstar Medalist Edition. This collection will run each Monday and focus on our Morningstar Analyst Ratings. Morningstar Medalists are the positively rated funds that have received a Gold, Silver, or Bronze Morningstar Analyst Rating, and they represent the funds our analysts consider likely to outperform their peer groups and/or relevant benchmarks on a risk-adjusted basis over a full market cycle of at least five years. All Morningstar Medalists are funds that Morningstar's analysts believe have sustainable advantages versus their peers.
In this series, we'll highlight individual Morningstar Medalists and provide updates on recent ratings, including new ratings and ratings changes. We'll also shine a light on the ratings process itself, as well as findings from our growing body of Morningstar Analyst Ratings (approximately 1,100 ratings and counting).
Does your fund manager buy what he is selling or is he just making a sales pitch? One way to find out is manager investment. Mutual fund managers have to disclose how much they invest in their funds based on ranges that go from zero to more than $1 million, so we have a way of finding this out.
Overall, nearly half (49%) of fund managers don't invest in their funds. On the other end, about 10% invest more than $1 million in their fund.
It's something we look at when we rate funds, but it's also interesting to see what they say about our ratings in the aggregate. Funds with higher manager investment levels tend to be better performers with lower costs, as we detailed here.
With that in mind, I broke down the manager investment levels by analyst ratings. I did two splices. One had all funds we have rated, and the other excluded target-date and index funds. The reason is that managers of target-date and index funds typically run many funds and therefore are less likely to invest a high level in each of their funds.
Where funds had multiple managers, I used the highest investment level.
Let's start with the group that excludes index and target-date funds. Sure enough Gold-rated funds had the highest manager investment levels, followed by Silver, Bronze, Neutral, and Negative. Specifically, 54% of managers of Gold-rated funds had more than $1 million invested in their funds, 47% of Silver-rated fund managers have more than $1 million, 35% of Bronze-rated fund managers had more than $1 million, 25% of Neutral-rated fund managers had more than $1 million, and 8% of Negative-rated fund managers had more than $1 million invested in their funds.
At the other end, there was a fairly even distribution of managers with nothing invested in their funds except for Negative-rated funds, where that figure was 36%--about twice what you saw for other ratings.
Looking at the breakdown with all funds included, the figures follow a similar pattern going from Gold on down, though at a lower starting level. There we see 42% of Gold-rated funds had investment levels over $1 million, on down to 19% for Neutral and 4% for Negative. The amount with no money invested jumps across the board, and once again the Negative-rated funds have about double the level that the other rating levels have.
Large-Cap U.S.
Drilling down to our large-cap Gold funds, 24 of 35 funds had more than $1 million invested. Eight of those below the $1 million level are index funds. For example, Michael Buek has between $100,000 and $500,000 invested in Vanguard 500 Index (VFIAX) and Vanguard Tax-Managed Capital Appreciation (VTCIX). All told he's a listed manager on 22 funds at Vanguard including their target-date funds, so that seems reasonable to me.
There are only three actively managed Gold-rated funds with less than $1 million invested.
One is Yacktman Fund (YACKX), where managers say they prefer Yacktman Focused (YAFFX). The other two are run by Dennis Lynch's team at Morgan Stanley: Morgan Stanley Focus Growth and Morgan Stanley Institutional Growth (MSEQX), where Lynch has $500,000-$1 million invested.
Why Ranges?
When I write about manager investment levels, I often get questions about why they are reported as ranges. It's understandable. When top managers are making eight figures a year, the $1 million max is hard to justify but that's what the SEC came up with. I'd suggest instead that we treat fund investors like adults. Tell them how many shares a manager owns just the way we tell stockholders how many shares a CEO owns. As time goes on that $1 million range will only seem smaller and more outdated.
For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.
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