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Data & Research June 18, 2008
Fund Managers Don’t Wear Their Own Brand
Morningstar found that mutual fund managers commonly shop outside their own funds.
Reported by Ellie Behling
Morningstar gathered management ownership information about every U.S.-run mutual fund in its database, amounting to about 6,000 funds, says a Morningstar news report. Many of the funds reveal no manager ownership, including: 46% of U.S. equity funds, 59% of international equity funds, 65% of taxable bond funds, 70% of balanced funds, and 78.5% of municipal funds.
According to the article, there seems to be a correlation between Morningstar ratings and fund manager investment. The Morningstar analysis found an average investment of $354,000 for its Fund Analyst Picks, compared with $52,000 for its average fund. Excluding funds where managers have good “excuses,’ such as target-date, single-state muni, and index funds, the average pick investment increases to $431,000, the report says. The median pick has an average of $430,000 invested by each manager, while the median fund overall has zero invested. Morningstar says 32 of its picks do have at least $1 million invested by all managers.
Excuses, Excuses
In the report, Russel Kinnel, Morningstar’s director of mutual fund research, cites two “excuses’ for fund managers not investing in the funds they run. First, a manager running single-state municipal-bond funds for a state other than the one in which he lives would not benefit from the tax breaks. Second, managers might be citizens of a foreign country that bars investment in U.S.-domiciled funds.
Kinnel continues to say that managers who run niche funds or a large number of funds have a good reason to be at the lower end of the ranges—but not to spurn investing in their fund entirely. “The number of managers showing no faith in their process is staggering,’ writes Kinnel. “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 the shareholders do.’
Kinnel calls for an amendment to disclosure rules, suggesting that fund managers be required to disclose the exact number of a manager’s investment. Under the current rules, mangers are required to disclose ownership in a group of ranges starting at $0 and going as high as “over $1 million.’