The investment research firm Morningstar is an example of one of the many ways the investment world has democratized in the last 20 years. As recently as the mid ’90s, information on mutual funds, stocks and general investment knowledge was hard to come by and often times even harder to understand. We use an institutional Morningstar tool, and we are generally fans of the work that their team does: the research is generally clear and honest. And they are willing to put a harsh light on things like fees and incentives.
eat your cooking
Is your manager eating what they cook?
Recently, their Director of Manager Research, Russ Kinnel, published the article “Why You Should Invest With Managers Who Eat Their Own Cooking”, and we wanted to share his findings.
His research improved on prior research into this area, which showed that managers who invest in the funds they manage not only tend to perform better than peers and vs. benchmarks, but also have a better chance of survival. He quantified this into a ‘success ratio’ and then looked across various types of funds.
For example, for ‘Balanced’ funds, those that hold stocks and bonds and seek more steady returns, the success ratio is nearly three times higher for managers who invest >$1M in their funds compared to those who invest none. For International Stock funds, the effect was a success rate nearly twice as high. Across fund types, managers who invested more in the funds they managed consistently had a higher success ratio.
This is one of the many readily available pieces of information on which we base investment decisions at KilterHowling when building portfolios: all else equal we know that a manager who has a higher financial interest in the fund has a better chance of success. We have found that the managers also do a better job at risk management and keeping fees low – and why not? What’s good for their money is good for the investors’.
We recently wrote about the Fiduciary vs. Suitability standard, and this ties into that notion: We believe that the more aligned a manager’s interests are with their clients, the better off the client is likely to be. This in no way guarantees future results or the absence of errors, but it improves the alignment of interests.
At KilterHowling we design and build portfolios intended to grow our clients assets or protect them, and these portfolios represent our best ideas and efforts to achieve these goals. Because we use these two focused solutions and blend them to suit clients’ needs we are also invested heavily in our own portfolios.
Beyond home equity, more than 95% of our principal’s personal assets are invested in KH Global Growth and KH Capital Preservation. This is not the only way to run an investment firm, but it is the one we think resonates well with clients and that makes our portfolio management as straightforward and focused as possible.
If your manager is cooking up a portfolio for you, it is fair to ask, “Are you going to eat that, too?”