Mutual Fund Characteristics — Nice or Necessary?
Q: An article in my local paper said to invest only in mutual funds where the fund manager has a significant amount of his/her own money invested. Does SMI consider this when recommending funds?
A: Generally speaking, it's a good sign if a mutual fund manager believes in the fund strongly enough to invest his or her own money in it. I've seen (mostly anecdotal) evidence that such funds may perform a little better than funds in which managers don't have any of their own money invested.
That said, this falls squarely into a category of what we at SMI call "nice-but-not-essential" fund characteristics. Other criteria in this category include: low expenses, a management strategy where the fund doesn't trade often, an absence of 12(b)1 marketing fees, no "soft-dollar" arrangements for the managers, and the fund having had the same experienced manager at the helm for an extended period. All these are positive features, and some people (like your newspaper columnist) may argue certain items on that list are critical.
It is true that all these factors have the potential to affect returns. But our Upgrading strategy takes into account the actual performance impact of these factors each time the fund-momentum scores are calculated. In other words, if any of these factors is affecting a fund's performance, for better or worse, there's no way to hide it from Upgrading's momentum rankings—it'll show up in the actual performance of the fund. If a fund can produce superior performance without one or more of these "nice-to-have" factors being present, we're content to buy the fund anyway. We know that if any of these "extra" factors becomes a serious enough problem, our monthly rankings will reveal the impact where it really counts: in the fund's actual performance. 
- Evaluating Manager Changes
- When to Sell Upgrading Funds
- Overview of the Upgrading Process
- SMI's Investing Principles page
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