How to Find Fund Managers That Eat Their Own Cooking

Hello, YieldAlley readers! As a reminder for the new month, we have updated the major CD rates for each brokerage. You can find the latest rates on our Brokerage Mastery page.

In this week’s newsletter:

• Rates Roundup for money market funds, brokered CDs, Treasury bills, and ultra short-term bond ETFs.

• Read of the Week: How to Find Fund Managers That Eat Their Own Cooking

• Elsewhere: Reddit IPO, Nvidia valuation, Cash to fixed income investments, Vanguard CEO stepping down

2023 fourth-quarter results have come out from nearly all S&P 500 companies. Growth was nearly 8%, compared with expectations for a rise of around 1.2% when the season started.

As we look forward, the strong results from these companies have offset macroeconomic uncertainty. This was led by the so-called Magnificent Seven tech companies, particularly Nvidia, which is now a $2 trillion company. Many investors still expect the Fed to cut interest rates, although this schedule is largely expected to be pushed back.

How to Find Fund Managers That Eat Their Own Cooking

A 2016 report by the Financial Times found that “half of the 15,000 mutual funds in the US are run by portfolio managers who do not invest a single dollar of their own money in their products.”

One of the main reasons why? “Fund managers are savvy investors, so they are less likely to invest in gimmicky, high-cost funds. I remember one firm telling us that they didn’t invest much in their own funds because they would rather invest in something cheaper.”

Expensive expense ratios will drag down your returns and have been correlated with underperformance (to be covered in more detail in a later edition). If you invest in mutual funds with active management, you must find a fund manager who eats their own cooking. Hundreds of managers have more than $1 million of their own money in funds. But there are even more without a single penny in their funds. That should raise alarm bells.

Actionable tip: Use Morningstar’s tool to find out how much their fund managers are invested. Here is one of Dodge & Cox’s most popular funds. We can see that DODGX’s fund managers have all invested more than $1 million into the fund.

Meanwhile, many of the worst-performing mutual funds in 2023 had managers who invested less than $1 million or no money at all into their funds.

Fund manager investments are far from the only signal that you should pay attention to when reviewing a fund, but it’s important to be aware of what they’re doing...and not doing. For us, it’s one of the baseline criteria that we first evaluate when looking at a fund.

• Reddit is targeting an IPO with a valuation of up to $6.5 billion.

• Nvidia tops a $2 trillion valuation and is now Wall Street's third most valuable behind Microsoft and Apple.

• Franklin Templeton’s chief market strategist suggests moving to fixed-income investments.

• Vanguard CEO Tim Buckley is stepping down.

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