A new article from Morningstar’s Russel Kinnel suggests that the greater the portfolio manager’s investment in the fund, the more likely the fund is to perform well. The article reviews the survival and outperformance of funds (“success rate”) over a five-year span from 2009 on and looks at manager investment as reported in the fund’s SAI.
The results show that funds in which the portfolio manager had greater than $1 million invested had a success rate of approximately 47 percent, compared to an approximately 35 percent success rate for funds with no portfolio manager investment. The effect generally held when splitting out funds by type, except for taxable bond and sector funds. In these instances, each had similar results at the top and bottom; though, at the top tiers there were few funds upon which to draw data. Balanced funds saw the greatest difference with a success rate of approximately 32 percent for funds with no portfolio manager investment compared to a success rate of approximately 85 percent for funds with a portfolio manager investment of greater than $1 million.
The article acknowledged that the results could indicate both direct and indirect effects. Kinnel suggests that portfolio managers may be choosing to invest in a successful fund, the result could indicate improved incentive alignment, or perhaps successful fund managers simply have more money to invest in their funds.