Why It Pays to Invest With Managers Who Have Skin in the Game

Why It Pays to Invest With Managers Who Have Skin in the Game

When the

American Century Small Cap Dividend

fund launched in April 2022, co-managers Ryan Cope and Jeff John were its earliest shareholders. “Ryan was the first investor, because he was faster to run downstairs to our investor center,” John says.

A number of studies indicate that funds with heavy insider manager ownership outperform their peers. While it’s too soon to tell whether John’s fund (ticker: AMAEX) will be a long-term winner, he and Cope also run the top-performing

American Century Small Cap Value

(ASVIX), which is closed to new investors. John has over $1 million of his own money invested in that fund, and Cope between $50,000 and $100,000, according to Morningstar. John is building toward the $1 million mark in the new fund by investing in it at regular intervals—what is called dollar-cost averaging.

“A significant component of my entire net worth is owned directly through our legacy small-cap value strategy, and now the new small-cap dividend strategy,” John says. Fund ownership “makes you balance risks and rewards with a finer point because you have that skin in the game.”

According to rules established by the Securities and Exchange Commission in 2004, fund managers must disclose how much they invest in their own funds once a year. You can find manager investments on the People tab for individual funds at Morningstar.com.

What’s shocking is how many fund managers don’t invest at all in their own funds, even though many consider insider ownership an important positive sign in the stocks they buy. Some 4,643 out of a total of 7,108 funds have zero manager investment, according to Morningstar. Only 1,174 funds have over $1 million in manager investment. It almost seems as if most managers have no faith that they can do their own jobs.

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“I think that’s a useful negative signal to investors,” says Russ Kinnel, Morningstar’s director of manager research. “Are their interests aligned with yours or not? The more gimmicky and junky the fund, the less likely a manager is to own it.”

Ownership is particularly revealing in a newer fund, as it is a vote of confidence when there is less performance information to analyze. The younger a manager is—and you often find younger managers running new funds—the greater the likelihood that a $1 million-plus investment is a significant part of their net worth.

Co-manager Michael Valentine of

Wasatch U.S. Select

(WAUSX) is 40, yet he already has over $1 million in the fund, which launched this past June. He says that all of Wasatch Global Investors’ new funds are developed by the managers running those funds—as opposed to a marketing team seeking to fit a sales niche—so he and other Wasatch managers are passionate about their own products and, consequently, invest in them.

You see a similar culture at another boutique fund shop, Thornburg Investment Management. “When we launch a product, it’s seeded by portfolio managers and the firm itself,” says manager Jeff Klingelhofer, who has $100,000 to $500,000 in his top-performing fund

Thornburg Summit

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(TSUMX). “[Co-manager Ben Kirby] and I both want to have our own capital at risk,” he says. Kirby has over $1 million in the fund.

Manager ownership isn’t as important as fund fees as a performance predictor, Kinnel says. Moreover, sometimes ownership levels can be misleading, as a fund manager’s personal risk profile might be different from his or her shareholders.

Still, when there’s skin in the game, if your fund has losses, at least you know the manager is also feeling your pain.

Email: editors@barrons.com

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