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Fund Managers Who Eat Their Own Cooking

According to fund tracker Morningstar, funds that have a significant amount invested in the portfolio from their manager’s pockets are likely to perform better. The Securities and Exchange Commission (SEC) made it compulsory since 2005 for fund companies to disclose their manager ownership. Using this data, Morningstar’s director of manager research Russel Kinnel compared funds and the degree of manager ownership against their performance in terms of benchmark returns between 2009 and 2014. The study concluded that 47% of funds having over $1 million of the fund manager’s personal money invested in the fund, outperformed benchmarks. The 47% figure is significant, as Kinnel says that nearly one-third of companies had either merged or shut down in the five-year timeframe. Meanwhile, 35% of funds that had no investment from their managers were able to beat their benchmarks. Fund Performance Based on Categories The performance difference is however not uniform for all category of funds. The most prominent difference was observed in U.S. and international stocks and Balanced funds. On the other hand, the ownership factor makes less impact on sector and taxable-bond funds’ performances. Among them, balanced funds showed the biggest difference in performance. As against a 32% success rate for Balanced funds with no investment from managers, 85% funds beat their benchmarks which have over $1 million investment from their managers. International funds having over $1 million managers’ money invested saw a 68% success rate, while those without managers’ personal wealth had a success rate of 32%. For U.S. stock funds, the success rate for funds with over $1 million of managers’ personal money was at 39%. Funds with no such investment from managers clocked a 29% success rate. However, sector funds showcase a less significant impact. Managers’ investment in sector funds helped 40% outperform, while 39% with no investment from managers outperformed benchmarks. Also for taxable-bond funds, 42% funds with manager investment beat benchmarks, while 38% funds with no manager money invested were able to succeed. Funds with Manager Investment Morningstar notes that 5,364 managers have no investment in their funds, while 2,659 have less than $100,000 invested. The number of fund managers who have over $1 million invested in their portfolios is just over 1,000. The list mentioned by Morningstar includes funds like the Artisan International Fund (MUTF: ARTIX ), which has total assets of $20.17 billion. This Zacks Mutual Fund Rank #2 (Buy) has 3 and 5 year annualized returns of 15.7% and 13.9%. The Oakmark Global I Fund (MUTF: OAKGX ), with total assets of $3.57 billion also features in the list. OAKGX has 3 and 5 year annualized returns of 18.8% and 13.4%. However, it currently has a Zacks Mutual Fund Rank #5 (Strong Sell). On the other hand, Zacks Mutual Fund Rank #1 (Strong Buy) fund Oppenheimer Global Fund A (MUTF: OPPAX ) is one such funds with manager investment over $1 million. OPPAX has total assets of $10.76 billion and its 3 and 5 year annualized returns stand at 19.2% and 14.3%. The Meridian Growth Fund (MUTF: MERDX ) saw investments from managers Chad Meade and Brian Schaub within a year they took over the fund. MERDX’s 3 and 5 year annualized returns are 15.6% and 16.6% and it carries a Zacks Mutual Fund Rank #3 (Hold). Similarly, Mihir Worah and Scott Mather also invested $1 million each after taking over the popular PIMCO Total Return Fund A (MUTF: PTTAX ) from bond investor extraordinaire William Hunt “Bill” Gross. PTTAX currently holds a Zacks Mutual Fund Rank #2. Interestingly on the other hand, Bill Gross, who had quit PIMCO in a shocking move to join Janus Capital Group (NYSE: JNS ), was reported to have invested $700 million from his own pocket in the Janus Global Unconstrained Bond fund. Should You be Interested in Such Funds? Managers who “eat their own cooking” helps in building confidence. Personal ownership in the portfolio means the managers’ money is also at stake along with investors’ money. However, this factor is limited to building confidence and acts only as a positive indicator. Investing in a fund based on if managers are investing should not be driving investment decisions. However, a fund’s fundamentals, historic and potential performance strength among other factors should also be considered. Low cost structure of the fund is also a key criterion. Investors may also look for a favorable manager rating. The mutual funds listed below carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. They also have encouraging year-to-date and 3 and 5-year annualized returns. These funds have a high manager rating . It measures the risk-adjusted performance of a fund’s management relative to the fund’s peer group. The minimum initial investment is within $5000. T. Rowe Price Health Sciences Fund (MUTF: PRHSX ) invests a lion’s share of its net assets in common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences. PRHSX may invest in companies of any size, the majority of fund assets are invested in large and mid capitalization companies. PRHSX currently carries a Zacks Mutual Fund Rank #2 and has gained 19.7% year to date. The 3 and 5 year annualized gains are 38.4% and 31.8%, respectively. The manager rating is 19.2. Janus Global Life Sciences Fund A (MUTF: JFNAX ) invests a large portion of its assets in companies that have a life science orientation. JFNAX generally invests a minimum 25% of its assets in companies that are part of the “life sciences” sector. JFNAX currently carries a Zacks Mutual Fund Rank #1 and has gained 18.2% year to date. The 3 and 5 year annualized gains are 39.9% and 30%, respectively. The manager rating is 13.3. Diamond Hill Select Fund A (MUTF: DHTAX ) seeks to provide capital growth over the long term. DHTAX invests in 30-40 US equities which the Adviser believes are undervalued. These equity securities may be of any size. The adviser estimates a company’s value devoid of its market price and also takes into effect the industry competition, regulatory factors and various industry factors among others. DHTAX currently carries a Zacks Mutual Fund Rank #1 and has gained 8.9% year to date. The 3 and 5 year annualized gains are 24.1% and 16.2%, respectively. The manager rating is 7.8. Originally posted on Zacks.com

Concerned About Rising Interest Rates? Consider These 4 Alternative Investments

Summary Certain types of alternative investments are well suited to help prepare portfolios for rising interest rates in the future, while also potentially adding value in the present. We highlight senior loan, unconstrained bond, market neutral and global macro strategies. Looking past traditional stocks and bonds may help prepare portfolios for a future rise in rates By Walter Davis, Alternatives Investment Strategist As I travel across the country meeting with financial advisors and their clients, a common concern I hear voiced is “how can I position my portfolio for when the inevitable happens and interest rates start to rise?” In response, I state that certain types of alternative investments are well suited to help prepare portfolios for rising interest rates in the future, while also potentially adding value in the present. Specifically, I highlight four different types of alternatives for clients to consider: Senior loans (also known as bank loans, senior secured loans and/or leveraged loans) – Senior loans are loans made by banks to non-investment grade companies, commonly in relation to leveraged buyouts, mergers and acquisitions. The loans are called “senior” because they are contractually senior to other debt and equity, and are typically secured by collateral. Given that the loans are made to non-investment grade companies, the yield associated with them tends to be higher than on investment grade corporate bonds. 1 For example, as of the end of May, senior loans were yielding 5.51% versus a yield of 2.99% on investment grade corporate bonds. 2 Another key aspect of senior loans is that the interest rate paid is a floating rate that resets every 30 to 90 days. 3 This means that in a rising interest rate environment, as long as the rate rises above a predetermined minimum level, the investor will receive increased payments from the borrower. Therefore, senior loans may potentially outperform other types of bonds in rising rate environments due to their floating rates. Unconstrained bond funds – Unconstrained bond funds are funds in which the portfolio manager is given the flexibility to invest globally across all sectors of the fixed income markets. The manager also may use derivatives, leverage and shorting when implementing his or her strategy. Given the tools made available to the manager, unconstrained bond funds tend to have an absolute return orientation, meaning that they may seek to generate a positive return in any market environment. In a rising interest environment, an unconstrained bond fund has the ability to take advantage of rising rates by utilizing a number of derivative strategies. One such strategy would be to short Treasury bond futures. Treasury bond futures mimic the returns of Treasuries, which are negatively impacted by rising rates. Therefore, by shorting Treasury futures you would gain when interest rates rise. Furthermore, such funds have the ability to avoid regions and sectors that they do not find attractive while focusing on the regions and sectors they believe offer the best potential for success. In general, investors should expect unconstrained bond funds to potentially outperform traditional bond funds in down bond markets, and to possibly underperform traditional bond funds in rising bond markets. Market neutral funds – Market neutral funds seek to generate positive returns regardless of market environment by trading related stocks on a long and short basis. Such funds are designed to cushion a portfolio against broad market swings. Although market neutral funds invest in equities, many of these funds are designed to generate returns that are bond like, both in terms of the level of return and the volatility associated with the return. That said, investors considering market neutral funds should be aware that such funds, unlike traditional bond funds, do not generate current yield, and that they can experience more severe declines than traditional bond funds. Global macro funds – Global macro funds are funds that invest across the global markets in equities, fixed income, currencies and commodities on a long and short basis. As a result, these funds tend to be very opportunistic in their investment approach. When interest rates begin to rise, the fallout is likely to be felt across the global markets. Given the markets traded and their opportunistic nature, global macro funds have the potential to thrive in a rising interest rate environment. Read more about alternative investing from Walter Davis. References This is due to the increased credit risk associated with non-investment grade companies relative to investment grade companies. Bloomberg L.P. as of May 31, 2015. Corporate bonds are represented by a subset of the Barclays US Aggregate Bond Index, and senior loans are represented by the S&P/LSTA Leveraged Loan Index. Senior loans are usually priced relative to three-month LIBOR, with the lender receiving a fixed spread above the LIBOR rate. Therefore as LIBOR rises, the amount paid by the borrower increases. Importantly, most loans have a provision that establishes a minimum, or floor, for LIBOR. Typically the floor rate is around 1.00%. This helps protect the lender should LIBOR fall below 1.00%. Currently, the three-month LIBOR rate is approximately 0.28%. Due to the floor, LIBOR would need to rise above the 1.00% floor before the investor would receive the benefit of rising interest rates. Important information The Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market. The S&P/LSTA Leveraged Loan Index is a weekly total return index that tracks the current outstanding balance and spread over Libor for fully funded term loans. An investment cannot be made in an index. Past performance cannot guarantee future results. Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money. Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested. Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid. Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/fundprospectus for a prospectus/summary prospectus. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2015 Invesco Ltd. All rights reserved. Concerned About Rising Interest Rates? Consider These Four Alternative Investments by Invesco Blog

The Factor-Based Story Behind Successful Growth Funds

Summary Most large cap stock active fund managers underperformed their benchmarks in the 15 years to December 2014. Active large growth funds performed much better than large value funds vis-à-vis benchmarks. Virtually all of actively managed growth funds’ outperformance can be explained by quantitative multi-factor analysis. Americans have invested trillions of dollars in actively managed mutual funds in the hope of beating an index such as the S&P 500 or the Russell 1000 Growth. At Gerstein Fisher, we believe that markets tend to do a pretty good job of pricing risk and that most investors are better off “buying the market” (via an index fund) than trying to beat it. But we also think that there’s a better way to invest in equities than through either purely passive indexing or traditional active management. I’ll get to that method shortly after sharing summary results of a multi-step fund performance study that we recently conducted. Active Funds and Benchmarks We analyzed two Morningstar categories of funds, large cap growth and large cap value, from January 1, 1990 to December 31, 2014. During this 15-year period, 37% of the growth funds and 42% of the value funds disappeared-liquidated, merged, etc. We studied this aspect to eliminate survivorship bias in the study; obviously, funds that are shuttered by managers tend to be the poor performers. In the next step, we measured how many of the surviving funds outperformed their benchmarks during the 15-year time frame. Of the large cap growth survivors, 67.5% beat their benchmark (Russell 1000 Growth), while just 49% of the living value funds beat their bogey (Russell 1000 Value). All told, 42% of the large cap growth funds that existed in January 1990 beat their benchmark, compared to only 28% of large cap value funds. Moreover, the average outperformance for active growth was 2.14 percentage points per year vs. just 1.17 points for the active value funds. Two conclusions we can draw from this research are that 1) It is very difficult for professional portfolio managers to outperform an index, and 2) Growth appears to be the investing style that quite consistently performs best among actively managed funds. In fact, neither of these conclusions is either particularly new or surprising, as past research by Gerstein Fisher and others has amply demonstrated. See, for example, ” In Mutual Funds, is Active vs. Passive the Right Question? ” Explaining Outperformance But here is where the research gets really interesting. We conducted an extensive statistical analysis of the large cap growth funds that outperformed. We drilled down and studied whether quantifiable company characteristics, or “factors”, could be used to explain the outperformance. We honed in on just four factors– size, value, momentum and profitability-to measure the extent to which excess exposure (relative to the Russell 1000 Growth Index) to these factors could explain outperformance. I’ll digress very briefly to explain the theory and evolution of multi-factor investing. In 1976, Steve Ross published a landmark paper on Arbitrage Pricing Theory, which explained that security returns are best explained by more than one factor.* Since then, academics have identified dozens of quantifiable variables, such as momentum, that impact stock returns. In effect, even stocks from different industries that share similar such characteristics should generate similar returns. The Exhibit below illustrates the premiums over a 40-year period for the four factors we used to analyze the active growth funds. Note, for instance, that investors were historically rewarded with a 3-point premium (per year) for investing in more profitable companies and 3.5 points for being in smaller companies. (click to enlarge) Now back to our study. When we accounted for the momentum, size, value and profitability factors, we found that only 1.6% of the managers actually outperformed the benchmark (after adjusting for positive tilts to these four factors), or generated positive alpha (i.e., excess return of a fund relative to its benchmark). Another way of stating this is that 98.4% of the outperformers had higher factor exposure than the benchmark. For example, 95% of these winners had a positive tilt to value (relative to the Russell 1000 Growth Index) and 64% had higher-than-index exposure to smaller companies. Given this evidence that outperformance of active growth managers is almost entirely explained through their (witting or unwitting) excess exposure to certain factors, the next question is whether there is a rigorous, methodical, quantitative way to target certain factor exposures in order to outperform the index over extended time periods. We believe that there is-the Multi-Factor® quantitative investing style that underpins our three equity mutual funds. In the coming weeks, I plan to write a series of articles to elaborate on the principles and applications of multi-factor investing. In advance of that, I invite you to read a short piece we recently published on this investment strategy: ” What is a Multi-Factor Investment Approach? ” Conclusion Active fund managers have great difficulty beating passive indexes over long time periods. Actively managed growth funds perform well relative to benchmarks compared to value funds, but nearly all of the growth funds’ outperformance can be explained quantitatively by multi-factor analysis. *Finance students will recognize the factor-premium formula for portfolio return–+β11 +β22 +… … + β n n + –where portfolio return is described as the sum of the risk-free rate, factor exposures, and alpha. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.