Research has shown that funds whose managers invest in them do better than their peers, according to an article in Barron’s. Case in point: the American Century Small Cap Value fund, in which co-managers Ryan Cope and Jeff John are also investors, a top-performing fund. The two managers also invest in their American Century Small Cap Dividend fund, which launched a year ago.

Maintaining ownership in the funds they manage forces managers to “balance risks and rewards with a finer point because you have that skin in the game,” says John. And it’s easy for investors to learn whether or not managers have invested in their own funds; managers must disclose their investments every year, according to a 2004 SEC rule. But out of 7,108 funds, only 1,174 have over $1 million in manager money, and 4,643 don’t have any manager investments at all. That could be interpreted as a “negative signal to investors,” Morningstar’s Russ Kinnel told Barron’s, because the lower quality the fund, the less likely a manager is to invest in it themselves. Newer funds in particular can benefit from manager investment, giving it a boost of confidence in the absence of a performance track record. New funds are also more likely to be run by younger managers, who tend to invest more in their own funds, the article maintains.

At Thornburg Investment Management, funds are “seeded by portfolio managers and the firm itself,” manager Jeff Klingelhofer says, adding that he and other managers “want to have our own capital at risk.” And at Wasatch Global Investors, it’s the managers that develop the new funds, rather than a marketing team. Of course, having your manager invest in the same fund as you doesn’t guarantee returns. But at the very least, if you’re losing money, you know they are, too.

---