The current issue of Morningstar Advisor magazine provides some surprising data about how little mutual fund managers have invested in their own funds.

Mutual fund managers did not disclose their own investment in the funds they manage until after the ‘market-timing’ scandal in 2003.  Although there had been pressure to make personal investment disclosures over the years, it wasn’t until the industry was in a weak bargaining position that the disclosure became mandatory. 

The table below shows the number and percentage of funds where the manager has personal investments in the fund between the various ranges indicated on the left.

Amazingly, Morningstar’s data shows that more than half of all managers don’t have a single penny of their own money invested in the fund they manage! 

There are some legitimate reasons for a fund manager not to invest in their own fund.  For example, a municipal bond fund manager may be the manager on several municipal bond funds in other states.  The manager should only invest in the fund where he can get the tax benefit of the municipal bond in the state where he resides.

This does not explain why more than half of all managers don’t put any money into their own funds.  As Don Philips writes in the Morningstar article, “the industry is creating too many funds that its most knowledgeable participants – the funds’ managers – won’t buy themselves.”

In addition to pointing out the lack of substantial co-investment from the fund managers, Morningstar’s analysis demonstrates that the fund managers that don’t have skin in the game don’t perform well compared to the managers with a big personal stake in the success of the fund.   

In the table above, the column to the far right shows the average percentile ranking of each fund versus it’s category for the five years ending July 31, 2009.  For example, the 413 funds where the managers had a personal investment of more than $1 million, performed better than 58 percent of their peers for those five years in their respective category.

The table shows a direct relationship between the performance of the fund and how well a fund performs against its peers.  It makes sense – a manager with $1 million on the line cares a lot more than the manager with nothing to lose.

At Acropolis, we have always taken pride in the fact that we eat our own cooking.  It seems obvious, but it’s apparent from this practice isn’t the norm in the money management industry.    

The partners and their immediate family members have over $10 million invested in the same securities using the same strategies that we recommend to clients.  In fact, every security on the Approved List is owned by at least one of the partners. 

We believe that in eating our own cooking our interests are aligned with our clients.