This study examines the relationship between the level of portfolio manager ownership in the fund they manage and the future performance of the fund. The study finds a strong correlation between the variables, and the results support the idea that investors can use this information to identify mutual funds that are likely to perform the best in the future. Investing in one’s own fund is not required by any law or regulation and is thus a voluntary decision on the part of the manager. Due to new disclosure requirements implemented by the SEC in 2004, fund managers are now required to disclose the amount of their personal wealth invested in the funds they manage within the fund’s statement of additional information (SAI). This study is the first to use this newly available data to document a link between ownership and performance.

            The fund sample for this study consists of 1,406 funds for which ownership data are reported as of the end of December 2004. The authors find that substantial variation in ownership exists across funds. The average ownership stake is roughly $124,000 which translates to 0.06% of the size of the average fund. At the extremes, nearly 10% of all managers own over $160,000 (0.10%) of their fund’s assets, but 57% of funds have no manager ownership. The average holdings are highest for domestic equity funds where the average manager owns shares valued between $155,000 and $226,000. 

The important result of the study is that the authors find a strong positive relationship between reported ownership and risk adjusted performance during the subsequent year. Future risk adjusted performance improves by about three basis points for each basis point of managerial ownership. The authors then focus on the subset of managers who run more than one fund and find that these managers own a larger fraction of the funds that deliver better subsequent performance. To ensure the validity of these results, the authors control for several factors. First, they measure risk adjusted performance using both objective adjusted returns and abnormal returns as measured by the Carhart model. Second, they control for other factors that may affect managerial ownership such as fund size, fund family size, fund expenses, and tenure of the manager.   All results still hold strongly suggesting that fund managers have superior information about their future expected performance.

Overall, the evidence presented in this study indicate that fund investors can and should use managerial ownership information when deciding on the mutual funds to add to their portfolios.