Eat Your Own Cooking
active management, mutual fund

An article in The Financial Times shows the following statistics of mutual fund industry professionals who invest their own assets in low-cost passive vehicles, such as index funds and exchange-traded products (ETPs):

Portion of Assets in Passive Products Percentage of Responders*
Significant 45
Moderate 22
Nominal 14
None 20

* Numbers do not add up to 100 due to rounding

The main reason why about two-thirds of these professionals have a sizable part of their assets in passive instruments is said to be the compliance with fund industry regulations that prohibit trading in individual stocks or bonds. However, investment in actively-managed mutual funds is not prohibited, which is evidenced by one-fifth of professionals having only non-passive products in their private portfolios. It really looks like most fund professionals tout “alpha-generating” products to others by day, but personally shun them by night. How revealing.

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Funds Whose Managers Eat Their Own Cooking
mutual fund

A recent article published by Morningstar makes the following statement:

“What do you look for in a fund with a relatively new manager?

The first thing is a track record at other funds that indicates the manager has skill. Next, you want other key fundamentals like low costs, high manager investment, a good strategy, and a good fund company.”

The articles goes on to focus on those managers who have at least $1 million invested in their current funds and who had a good track record in managing previous funds. Unfortunately, despite the author’s efforts, the thesis of the article is not supported even by Morningstar’s own ratings of previous funds, let alone by Alpholio™’s RealAlpha™ measure of the current or previous funds:

Current Fund Rating Previous Fund Rating Real-Alpha™
Fidelity Small Cap Stock (FSLCX) * * Fidelity Small Cap Growth (FCPGX) * * * -0.81%
Fidelity Equity Dividend Income (FEQTX) * * Fidelity Value Discovery (FVDFX) * * * -0.49%
Fidelity Magellan (FMAGX) * Fidelity Trend (FTRNX) * * * * 1.02%
Fidelity Municipal Income 2015 (FMLCX) NR NA NA 0.29%
GoodHaven (GOODX) NA Fairholme (FAIRX) * * * 0.09%
Ariel Discovery (ARDFX) NR NA NA -6.05%
Royce Special Equity Multi-Cap (RSEMX) NR NA NA -1.47%
PIMCO EqS Pathfinder (PTHDX) * * Mutual Global Discovery (TEDIX) * * * * * 3.14%
Fairholme Focused Income (FOCIX) * * * Fairholme (FAIRX) * * * 0.09%
Akre Focus Retail (AKREX) * * * * * FBR Focus (NA) NA 2.8%

In the above table, the RealAlpha™ figure pertains to the previous fund, if available, or to the current fund, otherwise. For the most part, the previous fund ratings (or the current fund RealAlpha™ measures) do not support the thesis that the current funds will do well, even in the presence of a substantial investment by their own managers.

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