It can benefit both investors and mutual fund managers when managers ‘eat their own cooking.’

Investors consider a number of factors when they’re hunting for the right mutual fund, from the size of the fund to the experience of its managers. One question investors rarely ask, however, is, Does my portfolio manager invest in his or her own fund? They should, experts say.

After all, department stores ask their employees to dress in the brand’s clothes for a reason, and we all know the adage Never trust a skinny cook. Why shouldn’t the same principle hold true for mutual fund managers?

In 2011, Morningstar found a correlation between portfolio managers’ investment in their funds and fund performance, although Russel Kinnel, Morningstar’s head of mutual fund research, says there is not necessarily causation. Still, there are cases where it’s probably a good sign that your mutual fund manager invests in his or her own fund.

If you are looking for managers who will own the fund alongside their investors, be sure they actually hold more than a token amount, Kinnel says.

There are hundreds of funds where a manager has millions invested, but there are thousands of funds where they don’t invest anything, so it’s easy to spot those [$1-million-plus invested] funds, Kinnel says. He notes that firms with more managers who invest in their own funds tend to have a longer-term culture, which is ultimately beneficial for retail investors.

Portfolio managers who don’t invest in their funds have few excuses, he says. I’ll hear people say, ‘I don’t want to invest in funds because I live in New York [where taxes are high] and that’s expensive,’ but some of these guys are collecting bonuses in the $12 million range, Kinnel says.

Kinnel says it is ultimately better for long-term investors to find funds in which the manager invests rather than funds managed by a firm that ties short-term fund performance to manager compensation. Funds managed by firms that tie compensation to three-to-five-year performance are much better bets if you’re looking for a fund that practices those incentives.

Shorter-term incentives make managers feel compelled to chase whatever does well this year, and that is a recipe for mediocre performance in the long term, Kinnel says.

Russell Croft, president and portfolio manager at Croft Leominster, agrees with the idea that managers should invest a substantial amount of their money in the fund they run. Croft says it’s a good practice to invest at least 25 percent of your investment portfolio in the fund you manage. How much managers should invest in the fund also depends on the manager’s age and how much money they want to have in stocks versus bonds, because the fund may not be the perfect fit, Croft cautions.

Kinnel agrees with Croft’s contention that there are a few exceptions to the rule when it comes to what you should expect your fund manager to invest in his or her fund. For example, Kinnel says managers have a better excuse not to invest in target-date funds, single-state municipal bond funds and index funds. A manager may run 10 different index or target-date funds, making the expectation that he or she would invest in all of them unrealistic. For a single-state municipal bond fund, for example, it doesn’t follow that a Boston-based manager would own a California or New York fund because said manager doesn’t receive the tax benefit, Kinnel points out.

From a portfolio manager’s perspective, however, it only benefits a manager to invest in his or her own fund, Croft says.

We manage money for the long term, so why wouldn’t we be investing in our own funds? Why not put our money where our mouth is? It’s a good talking point with advisors, so they know we have skin in the game. It resonates, he says.

It’s tough to get a full picture of how much mutual fund managers invest in their funds, however, because data is limited. Morningstar can only obtain ranges of what managers invest, not exact dollar amounts. But among managers at funds of all sizes who do make the decision to invest hefty personal sums in their funds, a few trends are discernible.

Fund Managers with $1M or More Invested in Their Fund