The disclosure of ‘skin in the game’ by fund managers is vital to being transparent with investors, says Interactive Investor, after its research shows 20 managers have more than £1m invested in their own funds.
The analysis of the platform’s Super 60 and Ace 40-rated funds that requested skin in the game disclosure, found that the managers of 77 funds and investments trusts have invested in their own products.
This comes just four months after initial calls for the Financial Conduct Authority to introduce rules that require fund managers to publish how much they have invested in any funds or investment trusts they manage.
Scottish Mortgage kicked off the debate around managers and board directors being personally invested when it announced it was scrapping a rule that required its directors to invest in the trust before being permitted a seat on the board.
“Fund managers have an enormous responsibility because they power the nation’s pensions and Isas,” says Interactive Investor CEO Richard Wilson (pictured). “The best managers are celebrated and closely followed by a loyal army of private investors. Whether household names or otherwise, we think it only right that fund managers have an open relationship with their investors and disclosing skin in the game is an important issue of transparency.”
Who’s in?
Of the 82 individual funds and investment trusts included in the research, close to 94% confirmed that the manager had invested in their own fund, while 3.7% said they had not.
While the majority declined to state how much they had invested, 24.4% have plunged more than £1m into their own funds and an equal 4.9% have invested between £50,000 and £100,000, and £100,000 to £500,000 respectively.
Among those, Scottish Mortgage confirmed that it had more than £1m of personally invested money in the trust, while Baillie Gifford’s Responsible Global Equity Income fund houses between £500,000 and £1m of manager money.
The funds that housed manager money of more than £1m include the CFP SDL UK Buffettology fund, Fundsmith Sustainable Equity and Equity funds, Gam Star Credit Opportunities fund, and ES R&M UK Recovery fund, Lindsell Train Japanese Equity fund and UK Equity fund, Marlborough Multi-Cap Growth fund, and Stewart Investors Global Emerging Markets Sustainability fund.
On the closed-ended front, those with more than £1m invested include the Capital Gearing Trust, Utilico Emerging Markets Trust, Mobius Investment Trust, Pacific Assets Trust and Syncona Trust.
“Investors shouldn’t read too much into it as the influence on performance maybe mixed. They key to successful investing is being able to make independent and emotionally detached investment decisions and having too much skin in the game mean could lead to an unintended change in the managers behaviour,” says independent wealth consultant Adrian Lowcock.
How much is too much?
“Funds tend to be viewed positively by investors where the manager and the team ‘eat their own cooking’,” says Interactive Investor head of fund research Dzmitry Lipski. “Manager ownership can indicate commitment to investors and alignment of interests, although there are other schools of thought too: 11% of our research sample thought fund manager skin in the game can create a conflict of interest and encourage fund managers to take either too little or too much risk.”
For Fairview Investing director Ben Yearsley, managers being invested in their own funds does not present a conflict of interest.
He says: “I would expect all fund managers to be invested in their own fund. However, I don’t think it’s any of my business how much that is, as unless you know their net wealth the number is irrelevant – £1m might sound a high number, but is it relevant if the manager is worth £50m?”
Lowcock explains that while having skin in the game shouldn’t affect professional managers, the risk exists and is likely to increase the more the manager has invested.
“I would find it hard for successful fund managers such as Nick Train or Terry Smith not to back their own convictions and indeed have considerable skin in the game through the fund and their own boutiques,” he says. “Managers need to have a lot of self-belief to be successful so are likely to back themselves.
“Overall skin in the game is useful additional information but not a game changer for making the decisions on which funds and managers to invest in.”
Lipski adds: “Ownership stakes should not be analysed in isolation but alongside other criteria to establish extent of alignment of interest, such as firm structure and incentives to link fund manager pay with long-term performance objectives.”
