Eating Your Dog Food

Eating Your Dog Food

Last week I wrote about free lunches.  Let’s stick with the food theme and discuss a less appetizing meal; dog food.

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Those of you who have been reading my posts each week know that I don’t exactly sing the praises of high-fee, active fund managers (Don’t Stop Believin’ In Active Management).  Their business model is set up to reward the managers without really helping the investors and in fact, most of the time it hurts the investors.

“But Tim, the guys running most active funds are brilliant.  They are CFAs, MBAs, academics, scientists and math savants.”  

That is VERY true.  Most fund managers are really bright guys.  The analysts who work for them are pretty darn smart too.  They are great at crunching numbers, building models and understanding businesses.  They definitely aren’t  stupid.

Want to know another reason why I know they aren’t stupid?  Most of them don’t invest in their own funds.  They don’t eat their own dog food.

A few years ago the SEC started requiring that funds report how much money each fund manager had invested in their own fund.  Morningstar dug into these numbers and the results were pretty startling:

Looking at the data, the figures that jump off the page
are those where no one invested a dime. At U.S.-
stock funds, 47% report no manager ownership. And
it gets worse from there. 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.

The Morningstar study discusses a few reasonable excuses a manager can have for not owning a fund they run, but the majority will not fall into those buckets.  It’s ok to have only a little money invested in your own fund…but zero?  These guys have no faith in the product they are selling.  Why?  Like I said, they’re not stupid.

If you need more evidence that fund companies don’t believe in their own products, look no further than the string of class action lawsuits brought on by fund company employees being forced to invest 401(k) plans in their own funds!

Just this week, employees of American Century Companies, Inc. sued their company for excessive 401(k) fees (emphasis my own):

Since 2010, fiduciaries of the $600 million American Century Retirement Plan populated the plan’s investment menu solely with American Century funds, using a selection process “tainted by self-interest” rather than a prudent one that would have led fiduciaries to use less-expensive funds with similar or better performance, the complaint said.

Defendants have used the Plan as an opportunity to promote American Century’s mutual fund business and maximize profits at the expense of the Plan and its participants,” the plaintiffs said in the complaint, claiming the firm earned millions of dollars in fees by retaining proprietary investments.

Plan fiduciaries also allowed “grossly excessive” revenue-sharing payments to be made to JPMorgan Retirement Plan Services and Schwab Retirement Plan Services Inc., the plan’s two record keepers over the relevant time period, according to the complaint, filed Jun. 30 in the U.S. District Court for the Western District of Missouri, Western Division.

This lawsuit isn’t a unique occurrence.  In the past few years Putnam, Allianz, Mass Mutual, Ameriprise and Fidelity have all been accused of fiduciary breach in their own 401(k) plans by offering their own funds.

These companies send salespeople around the country peddling their high-fee products to advisors and investors, while their own employees want nothing to do with those same products.  Does that sound like a product you’re interested in?

So when you’re considering any investment, it’s always a good idea to understand if the people selling the product have skin in the game.  If the wicked smart fund managers don’t want to invest in their own high-fee, actively managed funds, why should you?

Further Reading…

Why You Should Invest With Managers Who Eat Their Own Cooking

The Challenges of a Long-Term Investment Strategy

The Million Dollar Bet


Tim Brennan

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