In the spirit of scarfing down that turkey you’re about to deep fry, here’s more indirect support for Spoke Funds® and the idea of eating your own cooking as a portfolio manager.
This comes from the 2006 working paper from the European Corporate Governance Institute titled Portfolio Manager Ownership and Fund Performance.
Highlight # 1:
For every basis point of managerial ownership, excess performance of the fund improves by about three to five basis points.
Highlight # 2:
Our evidence indicates that fund managers either have superior information about their future performance and/or that increased ownership in the fund improves a manager’s incentives to generate superior performance. We are unable to distinguish between these two interpretations, but both sets of arguments are equivalent from the perspective of the fund’s investors, in that they allow them to better predict future performance.
And check out these rationalizations for why mutual funds should not disclose how much their managers invest in their own funds…
Regulators in other countries and members of the U.S. fund industry have argued that the increased disclosure of fund manager ownership is not necessarily helpful. David Cliffe at the Financial Services Authority (an independent non-government agency in the U.K. that provides services to firms it regulates) stated in a Financial Times interview: “From a cost-benefit analysis, we just don’t see meaningful value for investors in requiring funds to disclose such information.”…
…Objections also came from large fund families such as Vanguard and Fidelity. Both publicly expressed their doubts regarding the impact of disclosing a fund manager’s personal stake in his own fund. For example, Fidelity spokeswoman Anne Crowley argued that “knowing a manager’s stake in a fund may tell potential investors whether the fund makes sense for the manager’s personal portfolio, but does not tell investors whether the fund fits into their own portfolio.”
Ah, yes. The ole “Why, investors can’t be trusted to handle that information, you fool!” defense.
It’s usually quickly followed by the “Investors should just trust us!” smile, and then the “Brokers who sell our funds could actually be making that determination about fit with their investors, but won’t” shoulder shrug.
I see your spin, Ms. Crowley, and raise you some sarcasm.
In any case, here’s the rest of the paper. And Happy Thanksgiving!
I wrote a post on my blog last week mentioning the highlights of the study below. I thought the entire study and data might be more useful for Spoke Fund® guys to see.
The study backs up the informal point I’ve made in prior posts here: that, all things being equal, ownership in your fund means better long-term performance. Here’s part of the conclusion (emphasis mine):
Regression analyses reveal that higher managerial ownership is positively associated with mutual fund returns and negatively related to fund turnover. Both findings are consistent with the reduction of the agency costs set forth in the Dow and Gorton (1997) model, where managers make value-reducing trades in lieu of making no trades when they cannot identify any suitable investments.
Investors should consider many variables when they choose to invest in mutual fund shares. The optimal fund choice for each individual depends on his goals, investment horizon, and risk profile. However, the results of this study suggest that investors of any tax status may need to add managerial ownership to the list of variables to consider when choosing a mutual fund investment.
Here’s the study itself: