Fund Managers Who Invest in Their Own Funds

Kurt Brouwer June 26th, 2007

Eleanor Laise, at WSJ Online had an interesting piece on a study released last year by the London Business School and the Georgia Institute of Technology on mutual fund managers who invest in their own funds. Her story came out last year, but it still is worth reading.

The study found that those who managers who do invest in their own mutual funds in a significant way, seem to have better performance. The correlation between a fund manager’s investment in the fund and the fund’s performance is very interesting [emphasis added]:

‘…Funds whose managers have a personal financial stake tend to reward individual investors with superior performance over funds that don’t have such close manager involvement, a new study shows. Investors can check up on their fund managers’ holdings now that the Securities and Exchange Commission has required funds since last year to disclose that information. Still, fewer than half of U.S. mutual funds included investments by managers, the study found…’

‘…The moves to encourage manager ownership could benefit investors. Researchers at the Georgia Institute of Technology and London Business School found that funds with managers who owned some fund shares at the end of 2004 delivered an average return of 8.7% in the following year. This exceeded the 6.2% average return by funds without manager ownership for the same period…’

‘…The study, which examined about 1,300 U.S. mutual funds, showed that manager ownership was highest in domestic stock funds and lowest in international bond funds. For every 0.01% increase in manager ownership, fund performance improved 0.03%, it found…‘

‘…Ajay Khorana, associate finance professor at the Georgia Institute of Technology and co-author of the study of management ownership, says managers personally invested in a fund may have greater incentive to maximize returns through such practices as keeping trading costs down. Also, because a manager can have a good sense of how well his fund is going to perform, he will invest when the outlook is favorable, Mr. Khorana suggests. Whatever the reason why manager ownership goes along with better fund performance, it’s “good news for the shareholder,” he says.’

 

I think this finding makes sense intuitively. If a portfolio manager has a big personal stake in his or her own mutual fund, it does make sense that this factor would impact the fund’s results.

Hat tip: Mutual Fund Blog

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