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How to pick better-performing funds

This story appears in the November 2006 issue of Entrepreneur. Subscribe »

Looking for an edge in the mutual fund market? Picking funds whose managers are also shareholders may boost your investment performance, according to the findings of a new study by researchers at the Georgia Institute of Technology and London Business School.

Tracking the performance of more than 1,300 funds, the study found that those with managers who owned some fund shares at the end of 2004 delivered an average return of 8.7 percent in the following year, compared to a 6.2 percent average return by funds without manager ownership over the same period. "We found a significant relationship between ownership and performance," says Ajay Khorana, co-author of the study and associate professor of finance at the Georgia Institute of Technology in Atlanta.

Why the performance boost? According to Khorana, "Having a stake aligns my interests as a manager with those of my shareholders, so I will try harder," he says. "The other side is when I as a manager know something that gives me great confidence in my portfolio, I will take a bigger stake to capitalize on that superior performance."

Under SEC disclosure requirements, managers' holdings are listed in relatively broad ranges. Although that can make it difficult to assess the significance of a manager's stake, ownership can still serve as a fund criterion, says Khorana. "Fifty-seven percent of managers own no stake at all, but the average manager has $97,000 in fund holdings," he says, adding that the more significant the manager ownership stake, the better a fund performs. "You can't look at ownership alone, but it can certainly be valuable in evaluating funds."

Jennifer Pelletis a freelance writer specializing in business and finance.

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