Fund Managers Who Eat Their Own Cooking

An important new performance indicator is how much money a manager invests in his own fund.
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Plenty of stock investors pay close attention to trades by company insiders. Investors figure that corporate executives know their businesses better than anyone else. So if a chief executive dumps all his shares, outside investors may lose confidence in the stock.

The same thinking should apply to mutual funds. When a portfolio manager refuses to invest in his own fund, investors should be wary.

In the past, few investors paid attention to manager investments, but that could change soon.


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has been tracking manager investments for 18 months, and it has begun publishing some of the new data. While it's too soon to draw precise conclusions, preliminary evidence suggests that investors should pay attention to what managers do, says Russel Kinnel, Morningstar's director of mutual fund research. "It's likely that there is a relationship between manager ownership and how funds perform," Kinnel says.

So far it appears that managers aren't stupid. They tend to invest in cheap funds and avoid those with high expense ratios. At

Oakmark Select

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, which charges relatively low fees, every portfolio manager has at least $1 million invested in the fund. Other low-fee funds in which managers own sizable stakes include

American Funds Washington Mutual

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T. Rowe Price Equity Income

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. On the other extreme is

SunAmerica Growth & Income

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, which has relatively high expenses and no investment by managers.

To be sure, you should never buy a fund solely because the manager has a lot at stake. But it pays to look at manager investments as one of several data points that you check routinely.

Many funds with strong performance records have high levels of manager investments, Kinnel says. He cites two lists compiled by Morningstar: "Fund Analyst Picks" and "Fund Analyst Pans." Funds on the picks list have low fees, solid long-term returns and disciplined investment approaches, while pans have high costs and unimpressive strategies.

Managers of funds on the picks list had invested an average of $370,000 in their funds, while the average pan fund had an investment of only $54,000.

Data on manager investments first became available in 2005 when the Securities and Exchange Commission began requiring companies to disclose holdings. To find how much a manager invests, consult the fund's "Statement of Additional Information." Many fund Web sites post the statements, and they are also available at Companies are only required to disclose the numbers in ranges, such as $1 to $10,000 and $500,000 to $1 million.

Morningstar's Kinnel says there might be a few instances when managers have good excuses for not investing in their funds. For example, a manager who lives in Massachusetts may have little interest in owning a California municipal bond fund. But in most cases, a manager should have enough confidence to invest in his own fund. Kinnel says he would only buy a diversified general fund where the manager has invested at least $500,000. For sector funds and niche choices, Kinnel wants to see at least $100,000 invested.

Only a minority of funds pass Kinnel's test. Most portfolio managers don't put any money in their funds, according to Morningstar. The investment rate is particularly low in some categories. In the foreign stock group, 59% of managers invest nothing in their own funds. The figure is 65% for taxable bond funds.

For some companies, investments by managers are seen as important parts of the corporate culture. Managers are expected to invest in their own funds to ensure they work for the benefit of shareholders. Davis Funds has had a long tradition of manager investment. Funds with heavy manager ownership include

Davis New York Venture

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Davis Financial

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Companies such as Davis charge reasonable fees and avoid introducing trendy funds that may not last over the long term. When managers invest in their own funds, they have a personal stake in delivering solid results.

Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.