Why should we expect anything different from mutual fund managers?

Morningstar recently published a report that examined the relationship between a manager’s ownership stake and a fund’s ranking within the company’s star rating system. The study found that core equity funds in which the manager had no investment averaged a rating of 2.93 stars out of five. The funds helmed by managers who had invested more than $1 million received an average of 3.51 stars. That might not sound like a huge difference, but a half star can translate into a significant gain, or loss, for your portfolio.

The Securities and Exchange Commission has only required mutual funds to disclose ownership levels since 2004. Morningstar’s study also compared several types of funds, making a true apples-to-apples comparison impossible. Consequently, the authors didn’t draw any definitive conclusions as to whether higher levels of management ownership influence a fund’s performance.

Nevertheless, the study suggests that investors benefit when managers have a stake in their funds, especially when one considers that Morningstar’s rating focuses on risk-adjusted returns.

Anecdotal evidence also supports this theory. The top performers in many fund categories are helmed by managers who have a stake in their charges. Some investors have gone as far as to use insider ownership as a driving force behind their decision to invest in a fund.

If you’re curious about whether the managers of your funds are willing to bet on their own abilities, you can find information on management’s ownership stakes in a mutual fund’s Statement of Additional Information. In the meantime, here are several of our favorite equity funds headed by managers who eat their own cooking.

Big Opportunities

Weitz Partners III Opportunity (WPOPX, 800-304-9745) first appeared in The Rukeyser 100 in November 2010. The fund’s returns place it in the top 1 percent of large-blend funds on both a one- and three-year basis, while its five-year track record ranks in the top 6 percent.

Manager Wallace Weitz, the founder of his namesake firm, owns more than $1 million worth of shares in the fund. He also holds stakes of more than $1 million in three other funds that he manages, though their performance has been less impressive.

In Weitz Partners III Opportunity, Weitz goes long on undervalued names and short undervalued stocks, creating what is essentially a 130-30 strategy used by hedge funds. Although the fund’s mandate allows him to short individual stocks, he instead bets against exchange-traded funds (ETF) that track corners of the market he believes have become too hot to handle.

Launched in 2005, the fund’s strategy has paid off for investors in almost every year. But in 2007 Weitz Partners III Opportunity plummeted to the bottom of its category, as big bets on housing-finance names such as Countrywide Financial and Redwood Trust (NYSE: RWT) went south. Despite that misstep, there’s no reason to believe that Weitz has lost his touch.

The Oakmark family of funds also deserves recognition for cultivating a culture of ownership; all of the company’s portfolio managers hold stakes of more than $1 million in their funds.

Bill Nygren, manager of Oakmark (OAKMX, 800-625-6275), is one of the fund industry’s stars, though he endured his share of criticism in 2007 when the economy soured. Nygren, like many other value managers, hung on to his investments in financial and consumer stocks. This miscalculation led the fund to post a 3.6 percent loss that year. He learned his lesson quickly, however. Although the fund declined 32.6 percent in 2008, it nonetheless performed better than more than 75 percent of its peers.

The Small Stuff

Not many mid-cap funds meet our criteria for recommendation and boast large management stakes. However, several small-cap funds fit the bill.

T. Rowe Price Small-Cap Value (PRSVX, 800-638-5660) ranks in the top quarter of its peer group on a three- and five-year basis.

Manager Preston G. Athey, who holds a stake of more than $1 million in the fund, takes an unusual approach to investing in small-caps. In a niche largely dominated by managers who are better characterized as traders than long-term investors, Athey employs a buy-and-hold approach. The fund’s annual turnover is quite low at 7.8 percent and a perusal of his portfolio holdings reveals names that he’s held since he took over the fund in 1991.

Athey tends to focus on smaller companies than those favored by many other value-focused fund managers. He identifies promising companies whose shares trade a discount to their peers. He lets the winners ride and sells names that have run up in valuation and outgrown the small-cap designation. This value-oriented approach and the fund’s low turnover rate result in respectable returns and low volatility.

Conservative Play Calling

Daniel Shackelford, the fund manager of T. Rowe Price New Income (PRCIX, 800-638-5660), owns only between $50,000 and $100,000 worth of shares in the fund he manages. But he’s invested more than $1 million in a number of T. Rowe Price funds.

Shackelford’s strategy epitomizes conservatism. He keeps 95 percent of the fund’s investable assets in investment grade bonds and hews closely to bonds with an intermediate duration.

T. Rowe Price New Income isn’t a fund that will generate outsized returns. But it will serve as an excellent core holding for the fixed-income sleeve of your portfolio.