Do Fund Managers Eat Their Own Cooking? (And Should Investors Know?)

Would you shop from a clothing store where the staff wouldn’t wear the clothes, or eat in a restaurant where the chef wouldn’t ever book a table? How about invest in funds in which the fund managers wouldn’t stow away their own dollars?

The question remains: Do fund managers invest in their own funds and, if they do, do investors have a right to know? After all, if managers are so bought in on the trillions of dollars of funds that they are managing on the behalf of their clients, why wouldn’t they be invested in those same funds?

On one hand, it’d make sense that fund managers would eat their own cooking. The end goal for fund managers is to make their clients money off of their investments. They really don’t have any incentive to lose their clients’ money. Never mind that corporate and investment management law mandates that the interests of investors (principals) are prioritized over of those of managers (agents). And, if a portfolio manager’s personal funds are at stake, it’s a tell-tale sign that they truly believe in the strategy and their interests align.

On the other hand, however, unlike sales managers, fund managers do not get accelerators if they exceed goals. Once they hit their goals, they’re done. So fund managers could, in theory, be doing the bare minimum. In this case, we could all be more profitable off of funds if they’re actively managed with 100% effort throughout the year.

But not everyone agrees that fund managers should be investing in their own funds, which may pose a conflict of interest for some. If investors have money at stake, emotions can come into play, and they may start managing with their own interests in mind.

Either way, perhaps fund managers should be more transparent about their own financial interests in the funds that they manage for clients. After all, companies’ non-executive boards of directors must disclose their shareholdings in annual reports. And the SEC requires companies to publicly share major events that shareholders should know, such as mergers and acquisitions, changes in control or auditors, the issuance of any unregistered securities, bylaw amendments, etc.

A 2008 paper published by Russel Kinnel, director of Fund Research at Morningstar, looked at investments in US mutual funds by professional portfolio managers who were responsible for those funds. And it found that between 50% and 70% of portfolio managers do not invest in their funds (47% of domestic US equity funds, 61% of global equity funds and 71% of balanced funds, in particular).

Whether or not portfolio managers have skin in the game, there is arguably a transparency gap that needs to be addressed.

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