Business

Not everyone 'eats their own cooking'

BOSTON — Jeff Auxier plowed all his retirement savings into Auxier Focus Fund when he launched it nearly a decade ago. He also vowed to never sell any of his initial $1 million investment.

That pledge has paid off. Through last year, his nest egg — along with his initial clients' stake — has grown a total 47 percent. And Auxier has made additional investments along the way.

But the 49-year-old's commitment has become tougher to uphold lately. His $80 million large-blend mutual fund (AUXFX) lost nearly 25 percent last year. But it still ranked in the top quartile of its category, thanks to some investments in recession-resistant stocks such as Wal-Mart Stores Inc. The downturn reduced what had been a $2.2 million investment at its peak to $1.6 million. This year, the fund is down another 9 percent.

With retirement decades away, Auxier still has no plans to reduce his stake. He says he couldn't face up to his investors if he didn't stick with it.

"There has to be a hook, where they can feel like, 'OK, this manager has got skin in the game, they're going to pay attention to my money because they've got money in there, too,'" said Auxier.

But managers like Auxier who "eat their own cooking" — the industry expression for managers who invest in their own funds, and eat the consequences along with their investors — aren't necessarily the rule.

Fifty-four percent of U.S. stock funds reported their managers held ownership stakes, according to research by Morningstar Inc. that examined disclosures through Oct. 1. That means nearly half the funds' managers hadn't invested as much as a single dollar.

Manager ownership is less common in other fund categories: 41 percent of foreign stock funds reported manager ownership, with 35 percent for taxable-bond funds; 30 percent for funds with a mix of stocks and bonds; and 22 percent for municipal bond funds.

To learn whether fund managers are joining them for the bumpy ride, investors may want to pay more attention to funds' annual reports due out about this time of year, and to documents called Statements of Additional Information that may accompany fund prospectuses. Some reports will trumpet the fact that a fund manager is personally invested, and the additional statements disclose how much a manager invests.

Russel Kinnel, director of Morningstar's mutual fund research, an "eat-your-own-cooking" advocate, advises investors shouldn't put a manager's level of personal investment ahead of other more important factors in making buy-or-sell decisions in funds. Considerations such as a fund's expense levels, long-term performance, and manager experience rank higher.

Manager investment "doesn't guarantee a manager won't make a mistake; it's more about a manager aligning their interests with yours," Kinnel said.

A manager of a fund that could be a core holding — one that's broadly diversified in stocks designed to perform well over the long haul — should be expected to invest at least $500,000, Kinnel says, and ideally $1 million or more.

For more volatile niche funds designed to supplement core holdings, Kinnel suggests a manager hold at least $100,000.

Investors can find ownership information from a fund company's Web site. Look for a fund's Statement of Additional Information and search for a manager's name to learn about their stake. The Securities and Exchange Commission and Morningstar also post such information at the following addresses:

■ www.sec.gov/edgar/searchedgar/mutualsearch.htm

■ www.morningstar.com/goto/fundspy

You won't find specific dollar figures. The SEC requires funds to report merely whether managers' stakes fall within one of seven ranges.

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