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Not even a penny? Report says most mutual fund managers don’t invest in their own portfolios

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Chances are your mutual fund manager doesn’t eat his own cooking.

A new report from Morningstar Inc. looks at fund managers’ personal holdings of the funds they run, and concludes: ‘The number of managers showing no faith in their process is staggering.’

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In other words, relatively few managers invest alongside their shareholders. Too often, a fund may be good enough for you, but not for a penny of your manager’s own money.

Morningstar compiled the data over the last year or so from reports the Securities and Exchange Commission mandated beginning in 2004.

The SEC requires only that fund managers disclose the range of their personal holdings in their funds, and the ranges are pretty broad -- for example, $10,001 to $50,000, $50,001 to $100,000, $100,001 to $500,000, etc.

Still, it’s enough to give fund shareholders a sense of how much their manager has at stake in the fund -- or, too often as it turns out, to show that the manager has nothing at stake.

‘When looking at the data, the figures that jump off the page are those where no one invested a dime,’ says Russ Kinnel, Morningstar’s director of fund research in Chicago.

Among the nearly 6,000 stock and bond funds that Morningstar analyzed, 47% of the U.S. stock portfolios reported no manager ownership, Kinnel says.

That’s pathetic enough, but ‘it gets worse from there,’ he says. ‘Fully 61% of foreign-stock funds have no ownership, 66% of taxable bond funds have no ownership, 71% of balanced funds put up goose eggs, and 80% of muni funds lack ownership.’

Some fund industry executives have contended that it may not make sense for a manager to own shares of a fund he oversees, depending on the manager’s own financial goals.

Kinnel, in his report, says that’s baloney.

‘There are really only two excuses for not owning a fund you run. First, if you run a single-state municipal-bond fund for a state other than the one you live in, it doesn’t make sense to own that fund as you won’t benefit from the tax breaks. Second, managers who are citizens of foreign countries have a good excuse if their country bars investment in U.S.-domiciled funds.

‘For managers who run niche funds or run a lot of funds, there’s good reason for them to be at the lower end of the [ownership] ranges, but not at zero,’ he says. ‘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 shareholders do.’

Damn right, Russ.


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