When researching funds managers that we will recommend to our clients, one of the factors that Moneyworks looks at is whether the people managing the fund actually invest their own money into the fund.
This is a question that we need to ask the individual fund managers, as there is no disclosure requirement in New Zealand or Australia at present about this issue. However, in the USA, the SEC requires funds to disclose how much each fund manager invested in his or her fund.
This disclosure requirement has enabled Morningstar to carry out an analysis of whether fund managers that invest a good amount of money into their funds are more successful than those that do not.
Morningstar Research Findings from US Funds
- 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. (Success rate is performing above the benchmark consistently)
- Balanced funds — investing in both stocks and bonds — showed a huge disparity: 32 percent success for managers investing nothing, and 85 percent for those investing $1 million or more.
- In a 2008 paper Morningstar also found that there were ‘staggering’ levels of managers not investing. Many categories of funds had between 50% and 70% of portfolio managers were not investing in their funds.
Why is ‘eating your own cooking’ important in our opinion?
Simply, by ‘putting your money where your mouth is’, your fund manager is saying that they believe in what they are doing. They know the people who are making the decisions around the fund and will have more information than the investors ever will on the decision making processes and the integrity and professionalism of those people.
Conversely, there are risks if the fund that you are invested in is mainly funded by the fund manager’s personal capital, as the manager may make more risky decisions in pursuit of their own gains.
If they don’t believe in their strategy enough to put their own money there, how much conviction are they going to have in the investments? How long are they going to stay around?
Although there are no disclosure requirements in New Zealand and Australia, the fund managers that do invest in their own funds seem quite comfortable sharing that information with researchers and advisers. While this is not a definitive measuring stick of how to choose a fund manager, the research and instinct means that it is a good indicator of future returns.
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By Carey Church