Morningstar published an article analysing whether fund managers who ‘eat their own cooking’ outperform managers who don’t. As intuitively expected the article confirms significant out-performance of the investment funds in which the fund manager has invested a significant amount of his own money.
The article was written by Russel Kinnel, the Director of Mutual Fund Research at Morningstar. The U.S. Securities and Exchange Commission requires portfolio managers to report how much of their own money they have invested in their own funds. Kinnel chose the five-year period beginning in the year 2009 for his study. For the performance criterion, he selected the so-called ‘success rate’; the number of funds that achieved a higher return than the average of the competition, after deduction of administrative costs, devided by the number of funds that survived the five-year reference period. Kinnel then categorized the funds according to the extent to which portfolio managers were invested in their own funds, in line with the seven categories that the SEC requires to be disclosed, and measured their respective success rate.
Global oriented funds in which the fund managers had not invested any of their own money achieved a success rate of only 31.5% whilst funds with the highest proportion of own investments achieved a succes rate of 67.9%. According to Russel Kinnel this is a great new tool to put to use; when you pick funds; “I’d go with the highest sum by any of the managers. I’m looking for that seal of approval and be wary when it isn’t there”. At Grit Capital we have invested practically all of our financial assets in our funds and unless we are ‘drinking our own cool-aid’ it should be comforting to know that we ‘eat our own cooking’.