A lot of managers talk a good game, but when it comes down to it, are they willing to put their money where their mouth is? At Kobren Insight Management, we consider this an important piece of information, and for some time, we have been gathering this data informally from our managers. Now, thanks to a recent policy change by the SEC, it is a little bit easier to answer that question for any manager.

Today, Mutual fund companies are required to formally disclose how much money their managers have invested in each of the funds that they run.. You won't find it "front and center" - it's not in the funds' prospectus - but in a rather obscure document called the "Statement of Additional Information."

Of course, a manager's stake in their own fund is just one of the many pieces of information we look at when analyzing a fund, which includes, among other things, track record, turnover, portfolio holdings, and the unquantifiable conviction in and passion of the manager. However, such "beneficial ownership" is meaningful for several reasons, and is just another tool we can use as we strive to deliver the highest risk-adjusted returns for our clients.

Why it is important:
A manager investing alongside with you is important because it is a clear confirmation that he or she truly believes that they can deliver superior returns. If the manager doesn't believe that he can attain superior results, why should you? It is also comforting to know that the manager's financial fortunes are directly tied to the fund you own, and that the manager is running your money the same way he would and does for himself. In addition to this, a manager who invests in his own fund is subject to the same fees that everybody else is, so they have a stake in keeping fees reasonable. While there are issues with the incompleteness of the data, our preliminary analysis in fact suggests that there is correlation between ownership by the manager and fund performance.

Why it's not so important:
There are some situations where a manager's personal stake in their own fund is less important, however. We don't necessarily expect managers of bond funds, or narrowly- focused funds such as sector funds, commodity funds, or emerging market and country-specific funds, to have major stakes in those funds as it might not make sense from a portfolio diversification point of view. However, we still expect the manager to have some sort of relevant investment there.

Also, some might argue that a manager's stake in their own fund does not add any additional incentive in the greater scheme of things. If a manager is very successful, the appreciation on the manager's investment in his fund may be marginal compared to the total compensation they earn. That said, we believe that it is still comforting, if nothing else, to know that the manager is right there with you. And even if the manager will generate a large amount of his income from other sources, investing in your own fund is simply "the right thing to do." Knowing that your manager is doing the right thing is invaluable.

Holes in the data:
Unfortunately, the way that the SEC designed its disclosure policy makes the data imprecise. The reason for this is that instead of listing an exact amount of shares that a manager owns, funds instead group ownership into fairly broad ranges. These seven groupings begin with 0-$10,000 invested and end with $1,000,000+ invested.

In addition to this, these numbers are not listed as a percentage of net worth, so it is impossible to determine just how much of a relative stake a manager has. A manager making $5 million a year who has $500,000 invested in his fund is a much different scenario than one where a manager is making $200,000 a year and has that same amount personally invested in their fund. Nevertheless, the numbers do provide information that we can work with. The Results:
We found that on average, our managers were heavily invested in their own funds. In fact, 83.3% of our managers had some sort of equity stake in their portfolio. This is much higher than then the 50% national average that a Georgia Institute of Technology and London Business School survey found. Even more impressive: If you excluded data from situations where you had a newly appointed manager who hadn't yet had the opportunity to implement his stock picks, then 87.8% of our managers were invested in their own fund.

In addition to this, on average our equity fund managers owned between $523,000 and $668,000+ of their own funds. In fact, slightly less than a third had a million dollars or more in their funds. Our managers are certainly a confident bunch, and we expected nothing less of them. We invest with managers that we have gotten to know and trust and this ownership data confirms what we already knew about them. With access to this new information, we are even more confident now in our ability to pick managers with great conviction, character, and ability.

-- Josh Bloomberg