Your Fund Manager Probably Doesn't Own Shares of Your Fund.
June 18, 2008
A recent report from Morningstar alerted fund investors to a seemingly disturbing fact: almost half of mutual fund managers don't own shares of the funds they manage.
Each manager on a fund must disclose his or her investment, so there are multiple investment amounts for every fund with more than one manager. When looking at the data (encompassing approximately 6,000 funds), the figures that jump off the page are those where no one invested a dime. In U.S.-stock funds, 47% report no manager ownership...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."
This piece led to several articles, including this one, where reporters were equally outraged. After all, would you eat in a restaurant where the chef doesn't eat his own food?
As long-term critical observers of mutual fund industry goings on, we're not going to take the bait on this one. We don't really care either way if a fund manager has money in the funds they manage.
Mutual fund managers at top fund companies are different than many individual fund investors. They are often very rich. Many of them make seven or eight figure incomes; many own stakes in their fund companies worth millions or even billions of dollars.
There are more investment opportunities open to rich people than mutual funds, including venture capital, hedge funds, and private equity. Most actively managed mutual funds are not ideal investments for rich folk in the highest tax bracket because funds often distribute other investors capital gains to whomever happens to own the fund at a certain time. Wealthy people don't even like paying their own taxes much less yours. Top fund managers can own stakes in the fund company itself. Buying their own fund would only increase there exposure because if the funds slip, the fund company stock they own could also drop. In addition, for the same reason we recommend keeping you allocation to company stock in a 401(k) down, fund managers may not want the additional risk of owning their fund because if they get fired for bad performance, they would have also lost a good chunk of their retirement money in the fund with the bad performance.
Most mutual funds are a retail product, meaning they are generally designed for people with net worths between $25,000 and maybe $1 million. The fee structures for many retail funds - notably load funds - are relatively high, and the more money invested the more in fees an investor pays. The benefit of diversification and active management are often worthwhile trade-offs for average investors given the difficulty of diversifying a portfolio globally with a small portfolio. Many of these expert money managers would do better owning the stocks directly. Let's not forget they are fund managers and choose their own stocks for a living.
We'd guess a lot of mutual fund managers do invest in high minimum/low fee institutional class mutual funds, ETFs, index funds, and even closed-end funds. In fact we've been watching famed bond manager Bill Gross buying shares in some PIMCO closed-end funds recently. If you have $10 to $100 million dollars and an annual income of over $1 million, you should do the same. For everybody else, keep an eye on the fees of your funds and do your best with a relatively small portfolio to keep the total portfolio expense ratio down and avoid load funds.
Your Fund Manager Probably Doesn't Own Shares of Your Fund.
A recent report from Morningstar alerted fund investors to a seemingly disturbing fact: almost half of mutual fund managers don't own shares of the funds they manage.
Each manager on a fund must disclose his or her investment, so there are multiple investment amounts for every fund with more than one manager. When looking at the data (encompassing approximately 6,000 funds), the figures that jump off the page are those where no one invested a dime. In U.S.-stock funds, 47% report no manager ownership...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."
This piece led to several articles, including this one, where reporters were equally outraged. After all, would you eat in a restaurant where the chef doesn't eat his own food?
As long-term critical observers of mutual fund industry goings on, we're not going to take the bait on this one. We don't really care either way if a fund manager has money in the funds they manage.
Mutual fund managers at top fund companies are different than many individual fund investors. They are often very rich. Many of them make seven or eight figure incomes; many own stakes in their fund companies worth millions or even billions of dollars.
There are more investment opportunities open to rich people than mutual funds, including venture capital, hedge funds, and private equity. Most actively managed mutual funds are not ideal investments for rich folk in the highest tax bracket because funds often distribute other investors capital gains to whomever happens to own the fund at a certain time. Wealthy people don't even like paying their own taxes much less yours. Top fund managers can own stakes in the fund company itself. Buying their own fund would only increase there exposure because if the funds slip, the fund company stock they own could also drop. In addition, for the same reason we recommend keeping you allocation to company stock in a 401(k) down, fund managers may not want the additional risk of owning their fund because if they get fired for bad performance, they would have also lost a good chunk of their retirement money in the fund with the bad performance.
Most mutual funds are a retail product, meaning they are generally designed for people with net worths between $25,000 and maybe $1 million. The fee structures for many retail funds - notably load funds - are relatively high, and the more money invested the more in fees an investor pays. The benefit of diversification and active management are often worthwhile trade-offs for average investors given the difficulty of diversifying a portfolio globally with a small portfolio. Many of these expert money managers would do better owning the stocks directly. Let's not forget they are fund managers and choose their own stocks for a living.
We'd guess a lot of mutual fund managers do invest in high minimum/low fee institutional class mutual funds, ETFs, index funds, and even closed-end funds. In fact we've been watching famed bond manager Bill Gross buying shares in some PIMCO closed-end funds recently. If you have $10 to $100 million dollars and an annual income of over $1 million, you should do the same. For everybody else, keep an eye on the fees of your funds and do your best with a relatively small portfolio to keep the total portfolio expense ratio down and avoid load funds.
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