In recent years, stewardship has been a growing topic in investment research, as studies have explored how an investment firm’s people, culture and processes can influence outcomes. One area that has drawn attention is manager ownership — the extent to which portfolio managers are personally invested in the funds they manage. The reasoning is that by having a personal stake in their own funds’ results, portfolio managers’ interests are better aligned with those of shareholders, potentially resulting in better outcomes.
Ownership varies among target date series
Among target date series, manager ownership can vary significantly. In its most recent annual report1 on target date funds, Morningstar found that:
- Only six of the series studied had at least one manager with at least $1 million invested (the highest dollar range investment firms must disclose under federal regulations).
- Of the roughly 140 distinct target date managers Morningstar reviewed, only 13 personally invested over $1 million in their own series.
- For American Funds Target Date Retirement Series®, all seven managers overseeing the series had at least $1 million invested.
Look for ownership in the underlying funds, too
In the context of target date series, manager ownership doesn’t just apply to the series itself. Managers can also invest in some of the underlying funds that make up the series. For example, all seven members of the Portfolio Oversight Committee (POC) that runs our target date series have invested in some of the underlying funds.2 Importantly, they also have helped manage some of the underlying funds used in the series. As a result of this experience, the management team has first-hand knowledge of the underlying funds’ characteristics and behavior in different market environments. This familiarity with the underlying funds can aid POC members’ glide path decision-making.
High ownership can potentially improve outcomes
Manager ownership is a topic we have researched in some depth. Our research found that, as a group, actively managed large-cap equity mutual funds with the highest manager ownership (at the firm level) beat indexes more often than peers with lower manager ownership.3 Similarly, Morningstar noted in a previous target date report that “funds with managers who invest alongside shareholders generally have better risk-adjusted records than those with limited or no investment.”4