Not even a penny? Report says most mutual fund managers don't invest in their own portfolios

Chances are your mutual fund manager doesn't eat his own cooking.

A new report from Morningstar Inc. looks at fund managers’ personal holdings of the funds they run, and concludes: "The number of managers showing no faith in their process is staggering."

In other words, relatively few managers invest alongside their shareholders. Too often, a fund may be good enough for you, but not for a penny of your manager’s own money.

Morningstar compiled the data over the last year or so from reports the Securities and Exchange Commission mandated beginning in 2004.

The SEC requires only that fund managers disclose the range of their personal holdings in their funds, and the ranges are pretty broad -- for example, $10,001 to $50,000, $50,001 to $100,000, $100,001 to $500,000, etc.

Still, it’s enough to give fund shareholders a sense of how much their manager has at stake in the fund -- or, too often as it turns out, to show that the manager has nothing at stake.

"When looking at the data, the figures that jump off the page are those where no one invested a dime," says Russ Kinnel, Morningstar’s director of fund research in Chicago.

Among the nearly 6,000 stock and bond funds that Morningstar analyzed, 47% of the U.S. stock portfolios reported no manager ownership, Kinnel says.

That’s pathetic enough, but "it gets worse from there," he says. "Fully 61% of foreign-stock funds have no ownership, 66% of taxable bond funds have no ownership, 71% of balanced funds put up goose eggs, and 80% of muni funds lack ownership."

Some fund industry executives have contended that it may not make sense for a manager to own shares of a fund he oversees, depending on the manager’s own financial goals.

Kinnel, in his report, says that’s baloney.

"There are really only two excuses for not owning a fund you run. First, if you run a single-state municipal-bond fund for a state other than the one you live in, it doesn't make sense to own that fund as you won't benefit from the tax breaks. Second, managers who are citizens of foreign countries have a good excuse if their country bars investment in U.S.-domiciled funds.

"For managers who run niche funds or run a lot of funds, there's good reason for them to be at the lower end of the [ownership] ranges, but not at zero," he says. "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.

"True, higher investment levels aren't a guarantee of success or an ethical manager, but at least they show that managers believe in the funds and they pay some of the costs and taxes that the rest of shareholders do."

Damn right, Russ.

Buffett bets on the S&P 500 to beat a fund-of-hedge-funds

The hedge fund industry can only exist because investors have faith that their fund managers will deliver above-average returns over time, despite the portfolios’ hefty fees.

Master investor Warren Buffett, who has long derided those fees as being way too high, now has made an interesting bet with a firm that runs so-called funds-of-hedge-funds: He’ll beat their net returns over the next decade simply by owning a mutual fund that tracks the Standard & Poor’s 500 index.

The bet is the subject of this article in Fortune magazine by Buffett’s long-time friend, writer Carol Loomis.

Buffett is going up against Protégé Partners LLC, a New York-based money manager that picks hedge funds for its clients.

Loomis writes: "Each side put up roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will be worth $1 million at the bet’s conclusion." Whichever side wins, the proceeds will go to charity.

Loomis, detailing the manager fees that will reduce the net returns realized by the hedge funds, figures that Protege can only win the bet by performing "much, much better than the S&P.

"And maybe they will. Buffett himself assesses his chances of winning at only 60%, which he grants is less of an edge than he usually likes to have," she writes.

"Protégé figures its own probabilities of winning at a heady 85%."

Before you read Buffett’s bet as a ringing endorsement of the S&P 500 index’s potential over the next decade, remember that he has made his multibillions by adeptly picking individual stocks and companies -- not by settling for the market return.

As one of the fund managers tells Loomis:  "Fortunately for us, we're betting against the S&P's performance, not Buffett's."

Read more on the Buffett/Protege bet here as well.

Photo: Warren Buffett. Santi Burgos/Bloomberg News

For what ails the well-heeled, Aspiriant hopes to get the call

When the investment advisory firms of Kochis Fitz in San Francisco and Quintile Wealth Management in Los Angeles decided to merge last fall, they said they’d pick a new name for their combined $5-billion-asset shop, which they believe is the largest independent wealth management firm in California.

The company announced the name choice on Monday: Aspiriant.

Hmmm. "Too much like aspirin?" I asked Tim Kochis, the company’s chief executive and a longtime leader of the independent-advisor industry.

"You’re not the first person to say that," he said. "We tried it out on some of our clients. One said, ‘I’ll take two and call my doctor.’ "

Nonetheless, Kochis said, the company’s principals decided that Aspiriant speaks to the firm’s mission: to help their well-heeled clients "integrate all the financial aspects of their lives, so they can be confident of achieving their aspirations over generations."

The combined firm provides financial advisory services to about 60 wealthy families and more than 300 corporate executives and other individuals.

Rob Francais, who had headed Quintile and is Aspiriant’s chief operating officer, said the company didn’t have much choice but to create a name because it wanted something it could trademark and take national as it expands. "You have to make up a name -- everything else has been taken," he said.

Maybe they made the right choice. The runner-up name, according to Francais: Aquidia.

Photos: Tim Kochis (top) and Rob Francais