Want an insider tip to picking a winning mutual fund?
Look first to see how much of his or her own money the fund manager has invested in the fund.
A fund manager who “eats their own cooking” – meaning who has invested lots of personal money in their own fund – is more likely to generate consistently good investment results.
While not a guarantee, it shows confidence in the fund’s investment strategy and a commitment to long-term results.
Surprisingly, many fund managers don’t invest in their own funds. “Of the 7,700 funds tracked by Morningstar, nearly half are run by managers who don’t have a single penny in their own funds,” reports Barron’s.
“I can’t think of why anyone should invest in a fund that its own manager doesn’t invest in,” says Russel Kinnel, Director of Fund Research and Editor at Morningstar FundInvestor.
“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,” he explains.
Certain fund companies – including many on our favorite “go to” list – are known for investing very heavily in their own funds. At well-respected Dodge & Cox, a hefty 60% of managers had over $1,000,000 invested in the funds they manage.
Firms like Royce, Janus, Artisan and American Funds also put their money where their mouth is.
“High levels of ownership are particularly common — and especially important — at boutique firms, which often offer more “high conviction” funds. All but two of the 14 funds at Artisan Funds, for instance, are run by managers who have at least a million bucks in their portfolios,” says Barron’s.
And at Janus, managers receive incentive pay — roughly a third of total compensation — that goes straight into the funds they run, to be vested over four years, reports Barron’s.
Other firms – like TCW, Neuberger Berman, PIMCO, Calamos, Manager Funds, Davis Advisors, Aston and William Blair – reportedly have sizable manager participation. Among the bigger companies, Franklin Templeton and Vanguard also posted respectable numbers.
Financial Tip: We also prefer funds, and fund companies, that tie the manager’s compensation to long-term performance, such as how a fund has done over a three-to-five year period. Fund managers who are incentivized based on short-term or quarterly performance tend to take unnecessary risks as they try to “shoot the lights out.” That can lead to volatile, crash-and-burn performance, not at all conducive to building wealth over time.