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It pays to invest with managers who invest in
their funds.
I’ve suggested this before and now I have more conclu-
sive data pointing this way. Last year I looked at the
Morningstar
500
funds and found that those in which
managers invest more than
$1
million produced
modestly better performance than the rest of the subset.
Now I’ve looked at the broader fund universe and
found a strong link.
The
SEC
requires managers to disclose how much they
invest in their own funds. Unfortunately, the
SEC
requires bands rather than actual dollar figures. Those
bands are: none,
$1
–
$10
,
000
,
$10
,
001
–
$50
,
000
,
$50
,
001
–
$100
,
000
,
$100
,
001
–
$500
,
000
,
$500
,
001
–
$1
million, and over
$1
million. You can find this infor-
mation in a fund’s Statement of Additional Informa-
tion and in the Fund Spy tool, Spy Selector, on
mfi.morningstar.com
.
This is very useful information, though it fails
to distinguish among managers with more than
$1
million invested.
Eventually,
Janus Global Unconstrained Bond
JUCDX
will disclose that new manager Bill Gross has
more than
$1
million in the fund. That doesn’t tell
us much about the percentage of wealth Gross has
invested with shareholders, though. Indeed, in
January we learned that most of the nearly
$1
billion
that flowed into Janus Global Unconstrained Bond
last year came from the office that manages Gross’
personal portfolio. That’s a great sign that Gross
eats his own cooking, but we would not have known
the magnitude of his commitment without news
reports. Relying on the
SEC
, we would have known
only that Gross, who is worth about
$2
billion,
has more than
$1
million in the fund.
If the
SEC
required the total dollar amount or the
number of shares, we’d be able to track investments
more precisely. Despite the limited usefulness of
the disclosure bands, they may still have predictive
power. To test it, I looked at manager investment
levels from
2009
and then tracked five-year perfor-
mance from that point on. I grouped funds by top
manager investment range and then asked what
percentage survived and outperformed their category
peers. That gave me a success rate. This, in turn,
gives us an idea of whether you can improve returns
by choosing funds with high manager investment
levels. I exclud-ed index funds and funds of funds
from the test. We used a single share class per fund.
Results
It turns out that manager investment does have
predictive power. Funds in which managers invested
nothing had the lowest success rate, and those in
which a manager had more than
$1
million invested
had the highest success rate. The rate generally
progressed higher with manager investment levels.
See Table
1
for details.
Managers investing no money in their funds had a
meager
35%
success rate, those with between
$100
,
001
and
$500
,
000
had a
43%
success rate, and
those with more than
$1
million had a
47%
success
Manager Investment
Brings Better Results
Fund Reports
4
Akre Focus
Dodge & Cox International
FMI Large Cap
Hennessy Focus
Morningstar Research
8
Frontier Markets Begin
to Emerge
The Contrarian
10
Where Fund Companies Will
Try to Spin You
Red Flags
11
Hot Performers With High
Price Tags
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
How to Combat Portfolio Sprawl
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
Energy Sell-Off Spurs Outflows
and Bargain-Hunting
FundInvestor 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel,
Director of FundResearch and Editor
FundInvestor
February 2015
Vol. 23 No. 6
Research and recommendatio s for the s riou fund investo
SM
Continued on Page 2