Cooking Lessons from America’s Mutual Fund Managers
By Ron DeLegge, Editor
June 23, 2008

SAN DIEGO (ETFguide.com) “Put your money where you mouth is,” was the good advice given by a toothpaste commercial back in the 1970s.

But unfortunately, recent statistics reveal that America’s mutual fund managers haven’t been following that advice.

According to Morningstar, an amazing 47 percent of domestic stock fund managers report no ownership in the mutual funds they manage.

And that’s just the beginning of the valuable cooking lessons being dished out.

An astonishing 61 percent foreign stock fund managers similarly haven’t put their money into their own funds. Managers of taxable bond funds and balanced funds are shamefully worse. A ridiculous 66 percent and 71 percent respectively, report having a zero percent stake in the fund’s they manage.

What does all of this mean?

It means a lot of things.

It means fund managers aren’t investing their own money alongside of their fund shareholders.

It also means if fund managers have so much confidence in their own financial acumen they sure aren’t showing it.

Put another way, it means they aren’t eating their own cooking.

“It is obvious that fund managers should invest significant dollars of their own in their funds, so as to align their personal interests with their investors’,” says Louis Lowenstein, author of The Investor’s Dilemma: How Mutual Funds are Betraying Your Trust and What to Do About It (John Wiley 2008)

Lowenstein adds, “Managers’ willingness to put their own dollars alongside the public’s may be the single best marker for their credibility and integrity.”

Still, for all of the fuss over fund managers eating their own cooking it’s still no guarantee that fund managers will be able to consistently beat their benchmarks.

How about Bill Nygren, lead manager of the Oakmark Select I (OAKLX) mutual fund?

Even though Nygren eats his own cooking by investing more than $1 million of his own money in the fund, it hasn’t helped the performance of OAKLX. Over the past five years, his large cap value fund has underperformed corresponding barometers, like the iShares Russell 1000 Value Index Fund (Ticker: IWD). Nevertheless, Nygren deserves some credit. Unlike most of his cowardly peers, at least Nygren’s got the fortitude to consume his own unappetizing recipes. Good for him.

Since the bulk of actively managed mutual funds underperform their corresponding benchmark, maybe we shouldn’t be alarmed to learn that fund managers aren’t eating their own cooking. Think about it. Who in their right mind would ever  want to eat all of this rancid food? Rotten eggs and old banana peels anybody?

If you observe closely, fund managers through their actions appear to be trying to teach us a valuable lesson.
 
It’s a cooking lesson.

Fund managers are effectively saying, “Since we don’t eat our own junk food, why should you?”

And the recipe for investors is as simple to comprehend as a box of Cheerios: Don’t invest with mutual fund managers that don’t invest in themselves. Can it be any more clear?

Better yet, just stick with investing in index funds or index exchange-traded funds (ETFs) and let someone else eat the rotten food.

It’s doubtful that the typical mutual fund investor will ever pay attention to these cooking lessons, but you never know.

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