Some industry figures are calling on the Financial Conduct Authority to increase transparency relating to fund managers with ‘skin in the game’.
While directors of investment trusts are required by market rules to declare their transactions in the annual reports and accounts, fund managers are not. For open-ended funds, there is nothing that demands managers to state whether they are personally invested.
But following the move by the UK’s largest investment trust, Scottish Mortgage, to remove a long-standing rule that required its directors to invest in the trust before being permitted a seat on the board, Interactive Investor has urged the FCA and the Financial Services Consumer Panel to introduce measures that make it easier to determine whether a manager is personally invested in their fund.
According to the 2019 ‘Skin in the Game’ report from Investec, the number of share purchases by boards and fund managers has increased seven-fold in the past 10 years, currently standing at more than £4.8bn.
Annabel Brodie-Smith, communications director of the Association of Investment Companies, says: “The AIC Code of Corporate Governance encourages investment company directors to own shares in their investment companies. There is also support for directors’ fees to be paid or part paid in shares.”
You jump, I jump
For some, allocating money to an open-end or closed-end fund where the manager or members of the board are also invested is important as it means everyone has the same experience, and impact on the pocket, of the market’s peaks and troughs.
“Many shareholders are reassured if the directors and managers of investment companies own shares as they believe this demonstrates their interests are aligned with shareholders,” adds Brodie-Smith. “However, others believe share ownership can lead to biased decisions and may for example, encourage managers to take too much risk.”
Adrian Lowcock, independent wealth consultant, also warns that a manager that invests too much of their personal wealth should be a concern to potential investors.
“Having some of their own money invested into a fund they manage is reassuring as it suggests the manager believes in the proposition and their abilities as a manager, but too much and it could raise concerns that they are not well diversified and don’t necessarily understand risk and portfolio construction as well as one might believe.”
He also questions whether managers with a significant proportion of wealth tied up in their own fund would make it harder to emotionally detach.
“Fund managers should be able to overcome this bias with strong investment processes and teams to challenge decisions, but they are human, and emotion can creep in – too much skin in the game adds an additional and perhaps unnecessary risk.”
Strong diversity argument for removing compulsion to own shares
In its call for transparency, Interactive Investor stated that it should not be mandatory for fund managers or directors to allocate money to a certain product.
“Investment trusts are streets ahead of funds when it comes to skin in the game reporting – at least their boards are compelled to reveal their interests. But that doesn’t mean they should be compelled to own the shares – actions speak far louder when your arm hasn’t been twisted, after all,” says Moira O’Neill, head of personal finance at II.
O’Neill adds that there is a strong diversity argument for removing the compulsion to own shares, something that the AIC’s Brodie-Smith agrees with.
“It’s important to stress that we believe directors should not be required to own shares in their investment companies as this could be a barrier to some directors with relevant skills and could discourage diversity on boards,” O’Neill says.
Transparency is what’s most important
For Lowcock, whether a fund manager has a personal investment in their fund, or ‘skin in the game’ is important and something that investors should know.
“Transparency is what’s really important, giving investors the information means they can make a more informed decision and investors will decide what they feel is right for them,” he says. “A rough guide of ideally percentage of wealth would be good, but realistically it will have to be a value range.”
He adds, however, that while it was an important factor, it’s not the only driver for an investment, particularly as the individual fund manager circumstances are not known.
“Their total wealth, stage of their career and personal situations – all have a bearing on whether £100,000 invested is a lot or a little, for example,” he explains. “Also, the type of fund they manage might influence how much is actually suitable for them to invest in their own fund. Just because a manager runs a corporate bond fund doesn’t mean their personal investment strategy is, or should be, low risk.”
