More Examples of Fund Managers Who Fail To Invest In The Funds They Manage

Article From Morningstar
A version of this article appeared in the November 2010 issue of Morningstar FundInvestor. Greg Carlson is a mutual fund analyst with Morningstar.

Morningstar has conducted multiple studies demonstrating that the majority of mutual fund managers don't invest heavily in the funds they manage.

• Morningstar strongly believes that a significant level of ownership better aligns managers' interests with those of shareholders. Let's take a closer look at some funds in this situation.

Managers Micro-Cap MMCFX 
None of the managers at any of the four subadvisors who divvy up the fund's assets own a single share of it, according to its most recent Statement of Additional Information. One of those subadvisors came on board in December 2009, and portfolio managers' holdings in the fund were last disclosed as of October 2009. But the 11 managers from the other subadvisors have all worked on the fund since December 2007, so they've had time to build up stakes in it. They simply haven't.

While it's true that subadvisors are less likely to invest in funds they run, that's no excuse. There are a number of subadvisors who own hefty stakes in their charges, such as Jim Barrow of Vanguard Windsor II VWNFX, and Bill D'Alonzo, David Herro, and Dick Weiss of the Masters' Select funds.

Wasatch Ultra Growth WAMCX 
Manager Ajay Krishnan had between $100,001 and $500,000 invested in the fund at the end of 2009. That's not a small amount on an absolute basis, particularly for a small-cap fund. But given his 16-year tenure at Wasatch, including 10 years as manager of this fund, and the firm's intense focus on smaller companies, it's fair to expect a larger commitment. It would make the fund's expense ratio a bit easier to swallow.

Putnam Multi-Cap Growth PNOPX and Putnam Growth Opportunities POGAX 
These large-growth funds are both on the pricey side. Both funds are run by the same manager, Robert Brookby. He's steered the smaller Growth Opportunities since January 2009, and after a solid start there, he was tapped to take over the $3.5 billion Multi-Cap Growth in April 2010. As of Growth Opportunities' November 2009 Statement of Additional Information, he had between $100,001 and $500,000 invested in its shares. Not bad, but given the fund's aims to be a core holding and Brookby's five years as a portfolio manager, we hope to see a bigger stake in the future.

AllianceBernstein Growth AGRFX 
As of July 31, 2010, William Baird (who's served on the fund since late 2006) had between $100,001 and $500,000 stashed in the fund, while Vadim Zlotnikov had between $50,0001 and $100,000 invested in its shares. Meanwhile, Frank Caruso didn't own a single share of the fund. Amy Raskin joined as a fourth manager in November 2010 on the date of the fund's last SAI.

Investing Lesson
Only invest in investments that the financial advisor you work with has a substantial stake and commitment in. I am the largest shareholder in the no load mutual fund that I manage for WFG's clients. This is called "eating your own cooking."