Does Your Mutual Fund Manager (or Broker) Have Skin in the Game?

Good article in today’s Wall Street Journal. I could not agree with it any more (subscription Required to read the whole thing):

  • JANUARY 18, 2011
  • Look for Money Managers With Skin in the Game


    There is an old adage in investing: No one will ever take better care of your money than you do.

    If you aren’t confident of your abilities to manage money on your own, however, there is a logical way to tweak that saying and come up with a plan to determine who you can trust. It goes like this: No one will take better care of your money than a fund manager who is taking care of his own money.

    Intuitively, investors have known this is true—that a fund manager invested in his or her own fund is a better steward for shareholders—and research has touched on it, but a recent study from Morningstar Inc. proves the point more concretely. In 2010, the average core stock fund with no manager investment earned a rating of 2.93 stars, according to Morningstar. The average star rating rose with the amount of money managers invested; funds in which the manager had at least $1 million invested earned an average of 3.51 stars…

    “Whatever drives it, when a manager is also a shareholder, they tend to be a better steward for your money,” said David Kathman, senior fund analyst at Morningstar and one of the authors of the study.

    In 2010, 45% of core stock funds and 66% of core bond funds had no manager ownership, according to Morningstar…

    …quality managers always have invested in their own fund and not worried about it…the more he or she is likely to invest in the fund, the better the performance…

    “If nothing else, looking at how much the manager has invested could be a good thing to tell you if the manager has confidence in their own fund and if their interests are aligned with yours,” said Mr. Kathman.


    Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

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