Fund Managers Should Eat Their Own Cooking
Much has been made lately of BlackRock (BLK) fund manager Daniel Rice III. It turns out that a private company he and his family own also operates in the industry in which his efforts are focused at BlackRock. While he has a position in the funds he manages, his holdings in the family business are materially larger. Worse, there have been questions raised about trades in the funds perhaps being biased by the family business.
This situation is, clearly, at the extreme end of a spectrum. However, it brings to light an issue that all fund investors should keep in mind—are the fund managers to which money has been entrusted eating their own cooking?
Fund managers report their holdings to the Securities and Exchange Commission on a regular basis. While this is a good thing, there is a material degree of latitude in the disclosure. For example, a fund manager could report holding between $100,000 and $500,000 in the funds he or she manages. This is a rather broad range, for starters, and it doesn’t give any perspective, such as the percentage of the manager’s total investment portfolio that this sum represents. Clearly, an individual with $500,000 in a fund and $500,000 worth of assets in total is more aligned with shareholders than someone with $500,000 in a fund and $10 million in investible assets.
Manager ownership information isn’t always easy to find, either. This is not surprising giving the legal speak that drives disclosure in the funds industry. Most investors trying to read a fund’s summary prospectus, prospectus, and statement of additional information are likely to end up confused or asleep. These documents are so dense that most investors don’t even bother reading them. The summary prospectus game is one way to address this issue; it is more concise than the full prospectus. (A more skeptical take on the origin of the summary prospectus would be that it saves the costs of printing hundreds of pages of information that few people read.) However, the often vague ownership information can usually be found in the statement of additional information.
It’s important to remember that a fund manager owning shares in the funds he or she manages does not guarantee good performance. In fact, all it guarantees is that the manager will share in the gains and losses you experience as an investor in those funds. Still, it is comforting to know that the person to whom you have entrusted your wealth is in the same game as you, and truly believes in this investment.
Anyone who has “paper traded” in the stock market to practice before actually using real cash will readily understand this issue. Fake money simply doesn’t come with the same stress as real money. While mutual fund managers are using real money, if only a small portion of that money is their own, if any at all, the weight of the buy and sell decisions being made will inherently be less meaningful. This isn’t to suggest that fund managers don’t care about what they do, the vast majority are very conscientious, but it is hard to deny that money changes things.
There are some fund managers who make a point to highlight their ownership stake. John Hussman of the Hussman Funds, for example, frequently points out in his weekly commentaries that the majority of his life savings is in the funds he manages. With just four funds bearing his name, Hussman is a tiny player compared to Fidelity, but that could actually be a big part of the disclosure issue, as larger entities can lead to employees having less of an ownership mentality.
The benefits for fund investors in knowing this information is obvious. However, there is another side. As noted above, money changes things, and people are justifiably sensitive to discussions of their wealth. Some in the industry consider overly detailed disclosure as going a step to far. Most would agree that having to disclose their net worth to the world would be an onerous request. Still, using percentages would seem to avoid the issue in this situation.
BlackRock and Mr. Rice are taking steps to deal with the situation surrounding Mr. Rice’s ownership in his family’s company. This is a good thing, but it comes only after negative publicity surrounding the issue. For mutual fund investors, knowing if a fund manager is eating his or her own cooking can be an important differentiating factor when selecting through a small number of potential investment options. It shouldn’t be the first thing considered, but it definitely should be a part of the decision-making process.
At the time of this article’s writing, the author had positions in three Hussman funds.