Morningstar Advisor - Fall 2008 - 28

Gray Matters Funds Where All Managers Invest More Than $1 Million Allianz RCM Tech DRGTX Artisan International ARTIX Aston/Montage & Caldwell Growth MCGFX Baron Partners BPTRX Bogle Small Cap Growth BOGLX Clipper CFIMX Delafield DEFIX Dreyfus Appreciation DGAGX Davis New York Venture NYVTX Fidelity Dividend Growth FDGFX FPA Capital FPPTX Harbor Capital Appreciation HACAX Janus Venture JAVTX Julius Baer International Equity BJBIX Legg Mason Value Trust LMVTX Longleaf Partners LLPFX Mainstay ICAP International ICEUX Marsico Focus MFOCX Northeast Investors NTHEX Oak Value OAKVX Oakmark OAKMX Oppenheimer Global OPPAX PIMCO Total Return PTTRX Royce Special RYSEX Selected American SLADX Sound Shore SSHFX T. Rowe Price Equity Income PRFDX Third Avenue Small Company TASCX Vanguard Wellington VWELX Wasatch Small Cap Growth WAAEX Weitz Hickory WEHIX For complete list go to http://MorningstarAdvisor.com/magazine/ whitepaper.asp Conversely, the median pan has $0 invested. Twenty-seven of our picks can claim that all of their managers have at least $1 million invested and 55 have at least one manager with more than $1 million. Slicing and Dicing by Fund Family Among families too small to make our list, Legg Mason, Calamos, Baron, and Third Avenue have high ownership levels. Western Asset, MassMutual, and AIG have low ownership levels. Improving on the Ranges Using the ownership data, we can also see which families have the highest and lowest manager ownership across their funds. We looked at the 50 largest fund families for which information was available. We averaged the manager ownership numbers for each family using the median of each ownership range. For example, ownership in the $100,001–$500,000 range is counted as $300,000. (We counted ownership of more than $1 million as $1 million.) Two families—First Eagle and Oakmark—get a “perfect score” because all of their managers have at least $1 million invested in the funds that they manage. (It helps that these shops don’t have a lot of funds in their lineups—First Eagle has five; Oakmark has seven. But it’s still impressive.) Both of these shops earn high Morningstar Stewardship Grades; First Eagle gets a B for corporate culture and Oakmark earns an A. Similarly, the next five families with the highest manager ownership levels are mostly standouts. Artisan (average manager investment: $737,750), Dodge & Cox ($664,773), Royce ($537,826), Davis ($499,412), and American Funds ($459,733) are all among our favorite fund shops, with excellent corporate cultures. That American Funds is the secondlargest fund family by assets makes its heavy manager ownership particularly impressive. There are no surprises at the bottom of the list, where SEI and TransAmerica bring up the rear with no manager ownership, based on the firms’ disclosures to the SEC. None of these families has stood out in terms of stewardship, and we’ve had significant concerns about some of them, such as Federated, which gets a D for its corporate culture. The SEC can be too paternal toward fund investors, and that’s certainly true of the way that manager ownership is disclosed. Stock owners get to see the precise number of shares that the CEO and other top managers at a company own. Why shouldn’t fund owners see the exact amount that a manager has invested in his or her fund? When you consider that most investors own funds from one of the big fund companies, that $1 million range is awfully low. The typical manager at a big fund company is taking home well more than $1 million a year. Like the Alternative Minimum Tax, this rule also fails to acknowledge inflation. That $1 million cap is going to get less meaningful each year. If the SEC is not willing to require fund companies to disclose the exact number of a manager’s investment, it should run a study to find out what the top decile of manager compensation is and make the upper band two times that. The bands are also weak at the low end. By investing $1, a manager makes it into the $1–$10,000 range, thus buying in at the low end just for appearance’ sake. K Russell Kinnel is Morningstar’s director of fund research. David Kathman is a senior mutual fund analyst. and illustrates the conviction that we look for in a fund, as well as the alignment of management’s interests with shareholders’. Is it an accident that managers are reluctant to invest in the pans, which suffer from some combination of high costs, poor strategy, shaky management, and disappointing stewardship? The median picks have an average of $239,000 and $247,000 invested by each manager. See how much the managers of the 500 best and most popular mutual funds have invested in their own funds. Download the PDF “Manager Ownership of Morningstar 500 Funds” at MorningstarAdvisor.com. Go to: http://MorningstarAdvisor.com/magazine/ whitepaper.asp 28 Morningstar Advisor Fall 2008

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Morningstar Advisor - Fall 2008

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