Skin deep: Most portfolio managers avoiding their own funds

So much for having some skin in the game. While investors typically like to see that mutual fund managers are eating a bit of their own cooking and investing in the funds they run, it turns out that the majority of fund managers actually do not have a single dollar of their personal assets in their funds. According to data from Morningstar, managers in 2,257 funds, or 51%, of the roughly 4,400mutual funds it has tracked for ownership levels over the last five years, have not personally invested in their own portfolios. This may send a bit of a warning sign to some mutual investors. “If a manager is not investing, why should an investor?” Karen Dolan, director of fund analysis at Morningstar, said in an interview. At the same time, additional data from Morningstar show that mutual fund portfolio managers who have some skin in the game alongside their investors have done better than the funds whose managers own just a few — if any — shares in the funds that they run. Funds with managers who have $1 million or more invested in them, on average, had returns in the 42nd percentile over the five-year period ended July 31, according to Morningstar. That means they outperformed 58% of their peer, according to Annette Larson, a spokeswoman for Morningstar. Performance gets progressively worse as share ownership declines. Funds whose managers own no shares at all rank, on average, in the 54th percentile, according to Morningstar. Portfolio managers of only 413 funds out of the 4,383 that Morningstar has tracked for ownership levels for the past five years have more than $1 million invested in their funds. Not all funds are appropriate for managers themselves, of course, Ms. Dolan said last week at the Financial Planning Association's annual convention in Anaheim, Calif., where she presented some of Morningstar's findings. Furthermore, some funds may not be available outside of retirement plans, Ms. Dolan said. At the same time, some managers don't want to be pigeonholed into a particular style. Others might hesitate to invest because they know they may not be around very long, or they invest through a separately managed account platform at a lower cost than the public fund.