Managers Who Invest in Their Own Funds Outperform

The move to passively invested funds is both steady and monumental, as evidenced by Vanguard garnering 98% of all net inflow into U.S. equity funds in 2013. Nonetheless, it doesn’t look like a significant percentage of plan advisors are going all passive. In fact, firms like BlackRock, a leader in ETF and index funds, often recommend a mixture of passive and active. 

While most active managers don’t beat their index, which can vary by asset class, some do. So how do you pick the active managers that are mostly like to outperform?

Some interesting new research from American Funds points to two criteria that are leading indicators of which funds — or, more specifically, fund managers — are likely to outperform their index. The first: low costs. The second: managers who personally invest in their own funds (data that can be found in SEC filings). 

While portfolio turnover, manager tenure and incentives are also important factors, according to the new research, whether fund managers are willing to “put their money where their mouth is” may be one of the best ways to determine whether a fund will do well over the long term.