A few weeks ago, a tweet stating that “50% of mutual fund managers don’t invest a single penny in their own mutual fund” went viral. The source was cited as Morningstar.
While Indian FinTwit expressed a fair amount of outrage, it was misplaced. Because that study was on the U.S. market.
Research by Russel Kinnel, director of manager research for Morningstar, revealed that 1,155 funds out of 7,424 had at least one manager with more than $1 million of his or her own money invested. Thousands had no manager investment. Russ Kinnel has been doing this research for a number of years. In 2008, his study revealed that a “staggering number of mangers” do not invest in their own funds.
(To clarify: In 2005, the fund industry in the U.S. saw mandatory disclosures of fund manager ownership in the Statement of Additional Information – SAI. The SEC required fund managers to display ownership in funds in bands; none / $1-$10,000 / $10,001–$50,000 / $50,001–$100,000 / $100,001–$500,000 / $500,001–$1 million, and over $1 million. The maximum limit to be disclosed was capped at over $1 million.)
One response to the above-mentioned tweet was particularly amusing; it humorously suggested that we avoid “those 50% funds”, referring to the schemes whose fund managers choose not to invest in.
An arresting argument indeed.
There is a term called dogfooding which conveys an impeccable logic. This is it: If you are employed at a dog food company, you should be feeding your dog the same food. Why? Because if the product is as good as your marketing and sales team says it is, you would buy it yourself.
The term dogfooding is now predominantly used as slang by software companies. Developers who do not use their own software on a regular basis are often unable to understand the problems users face. It is tantamount to a sign on the restaurant that says: The owner eats here too.
In the fund industry, it would correspond to whether fund managers have “skin in the game” or “eat their own cooking”, which translates into whether or not they invest in the funds they manage.
I remember reading about Royce & Associates, a New York-based fund firm that created a policy requiring lead portfolio managers to invest at least $1 million in their funds, co-portfolio managers $500,000 and assistant managers $250,000. If they had insufficient money to meet the criteria, their quarterly bonuses were deferred into the fund. When Bloomberg reported it in 2010, the firm had $28 billion in assets with its 100 employees having $100 million invested in its funds.
Here in India, Kotak Mutual Fund worked on these principles in 2015. Should employees choose to invest in mutual funds, they would have to invest in the schemes from that AMC.
DSP Mutual Fund introduced the “skin in the game” concept in 2019. Kalpen Parekh, president at DSP Mutual Fund, said that it ensures that every employee will invest all his or her incremental savings only in mutual funds, and in DSP fund schemes. “We tell crores of investors to use mutual funds as a saving and investing vehicle, so what stops us from doing so? By investing in our schemes, we ensure that our hard-earned money stands along with investors’ money,” he explains.
When it comes to employees of Quantum Mutual Fund investing in their own schemes, the details are available to the public.
PPFAS Mutual Fund on its website declares that their "senior management team has resolved to invest a sizeable portion of their investible surplus into Parag Parikh Long Term Equity Fund” and other employees are “encouraged to do so”.
These are just some examples, and by no means exhaustive.
Colour me neutral
“While there is no legal requirement that mutual fund managers invest in their own funds, investors are right in principle to expect fund managers to be invested alongside them,” says Jiju Vidyadharan, Morningstar’s head of India business.
It does instil confidence in the investor. Higher investment levels aren't a guarantee of success, neither do they assure you of an ethical or capable fund manager, but at least they show that managers believe in the funds and pay the same costs that the rest of investors do.
Kaustubh Belapurkar, director of fund research at Morningstar India, believes that managers investing in their own funds is a good signaling factor for investors. “We do positively view asset managers encouraging/mandating fund managers to invest in their own funds as a good stewardship practice,” he explains.
Realising that you have money on the line and your fund manager doesn’t, can be irksome. But that does NOT mean you should discard options because the fund manager has no investments in the fund.
It could very simply be that the fund doesn’t suit that manager’s personal situation. There’s no sense in a 30-something manager investing heavily in his short-term bond fund.
If it is a sector or thematic fund, it may not go with the fund manager’s personal risk profile or may not fit into his own personal portfolio which may already have exposure to that sector.
Ditto in the case of a fund manager of an equity linked savings scheme, or ELSS. He may choose not to invest in the fund simply because he has maxed his limit under Section 80C.
Conversely, a fund manager may be heavily invested in his fund. But that doesn’t mean it’s a great fit for your portfolio. A fund manager’s style may be way too aggressive for your liking, even if he has all his savings in the fund, you may still want to steer clear.
Wrapping up, it will hold you in good stead if you view it as neither a virtue, nor a vice.
Investment Involves Risk of Loss.
