Core stock funds with manager-ownership of more than $1 million have an average star rating of 3.51 vs. 2.93 stars for funds with no manager investment, Morningstar said in a report on Monday.
Core bond funds show a similar trend: the average fund with more than $1 million in manager ownership has 3.90 stars, while the average fund with no manager investment has 3.20.
Morningstar also found a significant positive correlation between manager investment and manager tenure. “Among core stock funds with no manager investment, the average manager tenure is 4.7 years, but among core stock funds whose managers have invested more than $1 million, the average tenure is 12.1 years,” the Chicago-based research firm said in statement.
Morningstar has been studying whether managers invest in their funds since 2004, when it first rolled out its stewardship grades for mutual funds.
In a 2009 study, Morningstar found that funds with substantial manager ownership ($1 million or more) had significantly better five-year returns relative to their categories than funds with no manager ownership.
In its latest study, Morningstar took the most recent fund manager ownership data and looked at how it correlates to various other data points, explained fund analyst David Kathman, CFA, who worked on the study with Kailin Liu. “This time we focused on core fund categories, excluding sector funds and similarly non-diversified groups,” he said in an online summary of the research.
Who Has Skin in the Game?
While 45% of core stock funds have no manager investment, only 23% of core-stock fund assets are in funds with no manager investment. And while only 13% of core-stock funds have at least one manager with $1 million invested, 47% of core-stock fund assets are in such funds, Kathman explains.
“This reflects the fact that lots of small funds don't report any manager investment, while many of the biggest funds, such as American Funds Growth Fund of America (AGTHX) have managers with substantial skin in the game,” he said.
The pattern is similar with core bond funds.
Morningstar also looked to see if high manager investment is correlated with better fund performance. It found that the average three-year percentile ranking of core stock funds with zero manager ownership is 50, right around the category median, while those in the $1 million-plus band have an average three-year ranking of 38 -- which significantly better than the median, according to Kathman.
“It's a similar story with the Morningstar Rating for funds, which measure a fund's risk-adjusted returns relative to its category,” he said.
“The chart for core-stock funds is especially striking. Here, the average fund with no manager investment has 2.93 stars, and that number rises steadily until the group with ownership greater than $1 million, which has an average star rating of 3.5,” Kathman wrote in his analysis. “Core bond funds show a similar trend.”
Correlation Is Not Causation
While it’s possible that high manager investment contributes to better fund performance, it’s also likely that managers invest more in funds that already have good track records, the analyst point out.
“In the absence of fuller historical data, it's hard to determine cause and effect, and unfortunately the data don't go back far enough to provide meaningful conclusions,” he shared.
In addition, though, Morningstar found a significant positive correlation between manager investment and manager tenure. Among core stock funds with no manager investment, the average manager tenure is 4.7 years, but among core-stock funds whose managers have invested more than $1 million, the average tenure is 12.1 years.
Finally, it looks as though price (or expense) is not a particularly important driver in determining how much money managers invest in their own funds, Morningstar concludes.
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