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Fund Spy

Big Price Tags, Small Manager Investments

The managers of these costly funds aren't heavily invested in them.

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Morningstar has conducted multiple studies demonstrating that fees are the best predictor of returns. It's particularly disappointing then when managers of expensive funds don't invest heavily in them; Morningstar strongly believes that a significant level of ownership better aligns managers' interests with those of shareholders. Let's take a closer look at some funds in this situation.

 Managers Micro-Cap (MMCFX)
This fund's expense ratio was recently 1.53%. That's pretty lofty compared with the median 1.20% expense ratio for no-load small-cap stock funds. The fund was actually a bit more expensive in the past when its asset base was substantially larger, so at least fees are on the decline despite fewer economies of scale. However, it's still far above the norm. And none of the managers at any of the four subadvisors who divvy up the fund's assets own a single share of it, according to its most recent Statement of Additional Information. One of those subadvisors came on board in December 2009, and portfolio managers' holdings in the fund were last disclosed as of October 2009. But the 11 managers from the other subadvisors have all worked on the fund since December 2007, so they've had time to build up stakes in it. They simply haven't.

While it's true that subadvisors are less likely to invest in funds they run, that's no excuse. There are a number of subadvisors who own hefty stakes in their charges, such as Jim Barrow of  Vanguard Windsor II (VWNFX), and Bill D'Alonzo, David Herro, and Dick Weiss of the Masters' Select funds.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.