For fund managers, new research suggests that an old platitude is true when it comes to investing: eating your own cooking helps ensure higher quality.

A recent Morningstar evaluation showed portfolio managers investing more than $1 million in their own funds had a significantly higher success rate than those who invested less, or even nothing at all.

Russel Kinnel, editor of Morningstar FundInvestor, evaluated manager investment levels from 2009 and tracked their respective funds' five-year performance. The success rate was determined by grouping funds by the top manager's investment range and identifying what percentage survived and outperformed their category peers. Index funds and funds of funds were excluded and single share class per fund was used.

When looking at the success rate, the study found that managers investing up to $50,000 in their portfolio were in the 35% to 36% success range; those with between $50,000 to $1 million had a success rate between 40% to 44%; and those with more than $1 million invested had a 47% rate, the study found.

The risk-adjusted success rate for managers with no investment was 28% while fund managers with an investment of $1 million or more had a 39% success rate.

"It turns out that manager investment does have predictive power. Funds in which managers invested nothing had the lowest success rate, and those in which a manager had more than $1 million invested had the highest success rate," Kinnel concludes in the report. "The rate generally progressed higher with manager investment levels."

'STRONG BELIEF'

Citing reports from The Wall Street Journal that nearly $1 billion flowed into the Janus Global Unconstrained Bond came from the office managing Bill Gross' personal portfolio, as well as speculation that the new manager already has more than $1 million in the fund, Kinnel says that the amount of manager involvement ultimately reflects his interest with shareholders.

He speculates that the higher the manager's investment, the more likely they are to believe strongly in their strategy as well as the people in place.

"No one knows a fund better than its managers and naturally they can evaluate it well for their own needs," Kinnel writes. "They can evaluate people and process and are savvy investors when it comes to fees. So they are more likely to buy low-cost funds as we saw in previous studies. If a fund has high costs, they might invest in some other vehicle such as a separate account or simply buy the fund's underlying holdings directly for their own accounts."

'POSITIVE TREND'

Funds with no manager investment in U.S. equities had a 29% success ratio versus 39% for those in the top rung, according to statements from Morningstar. The same was true for international funds. Fund managers in the international space that chose not to invest saw a 32% success rate versus 68% for those with over $1 million invested.

Managers of the bottom- rung balanced funds saw a 32% success rate while top rung managers saw an 85% success rate.

"Municipal bonds showed a positive trend for moving up in investment level, but like the figures for sector funds and taxable-bond funds, the limited amount of data leads me to avoid conclusions," he adds. "Muni funds in which managers invested more than $1 million had an 80% success rate, but that comes from a mere five funds."

Kinnel notes that while manager investment does reflect on the fund's success, the numbers could potentially reflect the effect of success.

"Successful fund managers are likely to be paid more and therefore invest that money in their funds," he says. "To the degree those managers continue to succeed, the investment level will have predictive power. In fact, we're seeing more bonuses paid in fund shares."

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