Fund Managers' Vote of No Confidence

If you bought shares of a mutual fund, wouldn't it comfort you to know that the fund's manager had sunk some of his own money into the same investment? And what if you were to learn that your fund manager -- the custodian of your investment dollars -- didn't have enough faith in the fund to toss in so much as a nickel from his own pocket?

Alarming?

Well, that's exactly the message sent by about half of fund managers running U.S. stock mutual funds, according to data on about 6,000 funds followed by Morningstar. The Securities and Exchange Commission requires mutual funds to publish how much managers invest in their own fund -- it's contained in the fund's Statement of Additional Information. Among U.S. stock funds, 46 percent of those making investment decisions have zero dollars of their own at stake.

And that's as good as it gets. Even fewer managers of other kinds of funds are committing their own money. Among foreign-stock funds, 59 percent of managers have no ownership; 65 percent of taxable bond fund managers risk nothing; nada again for 70 percent of balanced fund managers; and zip, too, for 78 percent of muni fund managers.

There are two possible reasons a fund manager may not own his own fund, according to Russel Kinnel, Morningstar's director of mutual fund research. 1) A manager of a single state municipal bond fund who lives in another state may have no incentive to buy in because he would not benefit from the tax breaks. 2) Managers from foreign countries who run a U.S.-domiciled fund may be barred by their own countries from investing in it.

"The number of managers showing no faith in their process is staggering," Kinnel wrote in a recent report. "With the two exceptions I spelled out, I can't think of why anyone should invest in a fund that its own manager doesn't invest in."

-- Steven E. Levingston