From the October 2007 issue of Boomer Market Advisor • Subscribe!

Managers who have skin in the game

Whether you call it eating your own cooking, having skin in the game or putting your money where your mouth is, it's comforting to know when a service provider's interests are aligned with yours. That's certainly true of fund managers who invest in their own funds. Not only would a manager who's also an investor be less likely to cut corners, but a manager/shareholder is also likely to work harder when his own cash is on the line.

Morningstar's stewardship grades look at a fund's stewardship from a variety of angles, evaluating such things as the corporate culture of its management company, the level of fund fees, the independence and effectiveness of its board of directors and whether they invest in the funds they oversee.

The following list of funds have managers that believe enough in their process and ability to invest more than $1 million of their own money.

Janus Enterprise -- Although this mid-cap growth fund posted abysmal results during the bear market from 2000 through 2002, manager Jonathan Coleman has put it on a solid footing with a sensible strategy. Whereas some growth managers employ risky, growth-at-any-price strategies, Coleman is conscious of valuation; he'll only consider firms with good returns on invested capital and rock-solid balance sheets. Relatively low expenses and a big tax-loss carry forward -- a hangover from the fund's bear-market days -- seal its appeal.

Royce Select Equity -- Given that small-value funds have scorched larger-cap offerings for the better part of this decade, we've been telling investors to lighten up on these holdings, not add to them. This fund, however, is an exception. Manager Charlie Dreifus insists on buying straightforward businesses that generate cash and trade at big discounts to what he estimates they're worth. That approach has held the fund back over the past few years, as energy and other cyclical names have led the market, but we expect that Dreifus' stringent standards will reward long-term shareholders.

Fidelity Dividend Growth -- Although Fidelity could do a better job with other aspects of fund stewardship -- we'd prefer the funds' board had an independent chairman, for example -- many of its fund managers do invest heavily in their own funds. Charles Mangum is a case in point, signaling a belief in his process and his execution by investing more than $1 million in this stalwart offering. Mangum favors companies that deliver steady profit growth, a preference that has left the fund looking slow in the cyclically driven market of the past several years, but should hold it in good stead when profit and growth outlooks are less sunny. The fund's low costs -- an outgrowth of Fidelity's shareholder-friendly performance fees -- are another plus.

Thornburg Value, Thornburg International Value -- The funds' good stewardship doesn't end with the fact that lead manager Bill Fries has invested more than $1 million in each. In addition, Thornburg has built a tight-knit investment-centric culture and treats its shareholders as partners by communicating forthrightly about the holdings in their portfolios. Both funds make superb core holdings because they use broad-ranging approaches that encompass traditional dividend-paying value names as well as blue chip and emerging growth stocks.

Dodge & Cox International -- This is the only Dodge & Cox equity fund that's still open to new investors, but it's worth noting that the firm boasts a high level of manager ownership across its lineup. Dodge is well known as a world-class investment manager, and its shareholder-friendliness is a big part of its appeal. The funds' costs are low, the firm has an investment-centered culture that has helped it attract and retain management talent, and its lineup is utilitarian. This fund has put together top-flight returns on this fund since its launch in 2001, and though performance may moderate a bit given its girth, it's still easy to recommend.

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