In the August issue of Morningstar FundInvestor, I wrote about funds that passed a number of key tests, including manager ownership of more than $1 million.
In past tests, I’ve found manager ownership to be the second-best predictor of outperformance after fees. (If someone tells you fees aren’t important, they are selling something.) It’s frustrating that the SEC requires only that fund ownership be reported in ranges that top out at a $1 million, however. The typical manager of a large actively managed fund is likely making seven figures, and many are making eight figures. So, a $1 million investment is a good sign that managers are eating their own cooking, but we don’t know if it’s an appetizer or a main course.
For some perspective, I found that 1,155 funds out of 7,424 had at least one manager with more than $1 million of his or her own money invested. Kudos to the fund industry for producing so many investments it believes in. On the downside, thousands had no manager investment. Not so good, fund industry.
I decided to look for niche funds with manager investment levels over $1 million so I could see funds where managers really did go above and beyond in putting their money where their mouths are. I expect managers running core funds to invest more than $1 million, but I would not expect that for funds designed to be, say, less than 10% of a portfolio.
I built a table showing the percentage of funds in niche Morningstar Categories where managers had more than $1 million. It’s quite a range, from zero to 47% in convertibles.
Short-Term Bond There aren't many scenarios that I can think of in which you'd have a sizable chunk of money in a short-term bond fund. Maybe this happens if you are going to buy a house in a few months or you are so wealthy that you want an extremely defensive portfolio. In fact, no managers have more than $1 million in short-term government funds, but 10% of those running short-term bond funds do.
So, my hat’s off to Robert Galusza, who has more than $1 million in Fidelity Short-Term Bond FSHBX, which has a Morningstar Analyst Rating of Silver. A good short-term bond fund plays defense effectively in difficult markets, and this fund certainly has done that.
The same can be said for Tom Atteberry, who has more than $1 million in Bronze-rated FPA New Income FPNIX. The fund focuses on preserving capital and lost less than half what its typical peer did in the coronavirus-driven sell-off.
Mary Ellen Stanek and Warren Pierson both top the $1 million mark in Gold-rated Baird Short-Term Bond BSBIX. The fund is maybe a tad more aggressive than the first two, but it’s still a pretty cautious fund that will let its low fees help along the way.
Bank Loan Bank-loan funds have higher return potential than short-term bond funds, but they are still a rather small niche. They offer some protection from rising interest rates as loans adjust higher with rising rates--though, admittedly, rising rates are one of those risks that have mostly been absent this century. On the downside, bank loans have less liquidity and tend to have greater credit risk than high-quality bonds. Just 10% of bank-loan funds have a manager with more than $1 million invested. So, kudos to Eric Mollenhauer for having more than $1 million of his own money in Silver-rated Fidelity Floating Rate High Income FFRHX.
High Standard Deviation Let's flip the focus from the low-risk side to the high-risk side. I wouldn't want a big piece of my portfolio in a really volatile strategy, so I appreciate the managers willing to do just that because they believe in their strategies.
I looked for niche funds with the highest standard deviation for three years and manager investment over $1 million.
The highest I found was Vanguard Energy VGENX, which has a standard deviation of 18.5. Energy stocks have been pummeled, and so it’s impressive that Wellington’s G. Thomas Levering is suffering right along with the other shareholders in this Bronze-rated fund. Levering is the only manager among the 20 energy funds to be at that level.
Eddie Yoon has the good fortune of enjoying volatility on the upside. Gold-rated Fidelity Select Health Care FSPHX has a standard deviation of 16.3 because Yoon likes to mix volatile biotech names with more-established pharma and medical-device stocks. The fund gained 12% annualized the past five years. Interestingly, 30% of healthcare funds have a manager with more than $1 million invested. Two reasons are that a fair number of healthcare managers make a career in that sector rather than seeing it as a stepping-stone and that healthcare is a big chunk of the stock market and therefore not as narrow a niche as energy or utilities.
Baron Discovery BDFFX is a pretty bold small-growth fund, as evidenced by its 15.8 standard deviation. Comanagers Laird Bieger and Randolph Gwirtzman both have more than $1 million in this fund, which we do not yet rate. I found 31% of small-growth managers have more than $1 million in their funds.
Royce Opportunity RYPNX shows that small value doesn’t have to be sleepy. It has a 15.5 standard deviation owing to its deep-value strategy, which causes it to swing wildly with every up and down in the economy. Bill Hench has more than $1 million invested in this Bronze-rated fund. I found that 23% of small-value managers have more than $1 million in their funds.
Emerging Markets Emerging markets are volatile, and they can have long-lasting slumps. You must have a truly long-term perspective to enjoy the benefits, and you'll probably sleep better if you have less than 10% of your portfolio in emerging-markets funds.
Yet, eight diversified emerging-markets funds in the Morningstar 500 can claim manager investment of more than $1 million. In total, 19% of emerging-markets managers achieve that mark. That’s pretty respectable. American Funds New World NEWFX, Artisan Developing World ARTYX, Baron Emerging Markets BEXFX, GQG Partners Emerging Markets Equity GQGPX, Invesco Developing Markets ODMAX, Seafarer Overseas Growth and Income SFGIX, T. Rowe Price Emerging Markets Stock PRMSX, and Virtus Vontobel Emerging Markets Opportunities HEMZX all make the grade.
Why so many? I think one reason is that although it is a niche, managers tend to make a career of investing in emerging markets, so you see experienced managers who aren’t running more-diversified funds. Three of the eight have managers with more than a decade on the fund, and American Funds New World has a manager with more than two decades at the helm.
Rare Company Let's look at some funds in particularly rarefied air. M500 fund Third Avenue Real Estate Value TAREX is one of the two global real estate funds whose managers, Jason Wolf and Ryan Dobratz, hit the top investment band. That's just 4% of the category.
Only 5% of managers at foreign small/mid-value funds invest more than $1 million. Bernard Horn and Sumanta Biswas both have hit the top rung in Bronze-rated Pear Tree Polaris Foreign Value Small Cap QUSOX.
Only 7% of world-bond managers invest more than $1 million in their funds, but Dodge & Cox Global Bond DODLX boasts six managers who meet that mark. The seventh is in the $500,000-$1 million range.
I’ll wrap up with one more bond fund. Mark Kiesel has more than $1 million in his Pimco Investment Grade Credit Bond PIGIX. Only 8% of corporate-bond funds can make such a claim. Kiesel has been at the helm of this Silver-rated fund for about 18 years. He is an aggressive investor who manages the fund like he has the strength of his convictions, so I’m not surprised to see him back that up with his own money.
Where Can You Find Manager Investment Data? You can find this data in a few places. You can also find this information on www.morningstar.com when you enter a ticker and then click on the People tab.
You can get that info by clicking the Fund Spy tab and then choosing the Spy Selector. Once there, enter the ticker of the fund you want to research.
On the FundInvestor website, you can see the top investment level by selecting a category in the FundInvestor 500 tab and then scrolling to the right.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.