Some fund managers have skin in the game and some don't. It's pretty easy to decide which side you want to be on.
Fund companies are required to disclose how much of a manager's own money is invested in his or her fund using ranges that top out at above $1 million. A better rule would just require the exact dollar amount to be disclosed, as many managers have net worths of $50 million or more, but that's a discussion for another day.
We know that 818 funds have manager ownership above $1 million and 3,608 have no manager money at all in the fund. Why not invest where you know a manager's own money is at risk alongside yours?
- source: Morningstar Analysts
Managers with large investments in their funds are naturally going to be more long-term-oriented and risk-averse and even have incentive to keep costs low, although that's countered by the increased profits or bonuses they might get from higher fees. They are also a better bet to stick around.
There are exceptions where little or no investment is understandable. For index funds and target-date funds, a manager might run eight or more funds. I wouldn't ask a manager of a target-date fund to invest a lot in each target date, but I would like to see an investment in one of them. Some funds are managed by citizens of other countries where it isn't legal to own the US mutual fund. I'd like to see them at least invest in the strategy in some form.
I wouldn't invest solely based on manager investment, but I would factor it into the equation of picking a good fund, and that's what we do with the Morningstar Analyst Ratings. Seventy-one of our Gold-rated funds have manager ownership of more than $1 million. Here are seven that are worth a look.
American Funds New Perspective (ANWPX) has a great record, low expense ratio, and experienced managers. Four managers, Gregg Ireland, Dina Perry, Joanna Jonsson, and Robert Lovelace, have more than $1 million at the fund. The fund has a total of eight managers who operate independently by choosing a focused portfolio of U.S. and foreign stocks. Each has a slightly different strategy, but all are long-term-focused and fundamentally driven.
Causeway International Value (CIVIX) is run by lead managers Sarah Ketterer and Harry Hartford, who have more than $1 million and $500,000 to $1 million invested, respectively. They largely make informed bets on cheap stocks with turnaround potential. They bought materials and industrials in 2008, for instance, when the bear market was crushing them, and the fund rebounded nicely in 2009. The fund does have an unusual bar on emerging-markets equities, so most people will want to pair it with an emerging-markets fund.
Dodge & Cox Income (DODIX) boasts five managers with more than $1 million in the fund, and the other five are in the $100,000 to $500,000 bracket. Given how low yields are, you have to like a bond fund that charges just 0.43% in expenses. The fund focuses on issue selection in corporate and mortgage debt. That strategy has made the fund a really consistent performer.
Loomis Sayles Bond (LSBDX) has long been a favorite of ours. Dan Fuss and Elaine Stokes each have more than $1 million invested in the fund, and Matt Eagan has $500,000 to $1 million invested. Led by Fuss, the fund has long done a brilliant job of mixing opportunism and caution. It was really ahead of its time in combining foreign debt, high yield, and currency investing into one great package. Look at the annual returns and you can see that the fund will get whacked every once in a while, but Fuss and team are quite adept at sidestepping the worst of downturns yet making tremendous gains in rallies. The fund has a decent yield, but you really need to hold it for the long term.
With a modest $2.9 billion in assets, Oakmark Global (OAKGX) would appear to have a lot of room to grow. Comanagers Clyde McGregor and Robert Taylor each have more than $1 million invested in the fund. The focused fund has enjoyed brilliant results as the managers have found plenty of winners at home and abroad. I like world-stock funds because they give managers great latitude to find the best investments across industries and regions.
Vanguard Dividend Growth (VDIGX) manager Donald Kilbride has more than $1 million of his own money invested in the fund. I sometimes hear firms with subadvised funds argue that you can't expect such managers to invest in their subadvised funds. It seems like Vanguard subadvisors don't have that problem. This fund makes a nice core holding as Kilbride is a patient investor looking for companies with the potential to grow dividends. Those kind of companies tend to have good defensive characteristics, too.
Vanguard Wellington (VWELX) is easy to own, and that makes it easy for me to recommend year in and year out. John Keough and Edward Bousa both have more than $1 million invested in the fund. A well-managed portfolio that's two-thirds stocks and one-third bonds seems to moderate market volatility well enough to hold shareholders for the long haul. Its strong 7.8% annualized 15-year return is in the top decile of moderate-allocation funds, and its 6.9% annualized 15-year Morningstar Investor Return is top 6%.
- source: Morningstar Analysts
For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
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For information on the Morningstar Analyst Ratings, click here.
Russel Kinnel has a position in the following securities mentioned above: LSBDX DODIX
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