Make sure your fund manager has their money where their mouth is

Are the interests of the finance professionals managing your money properly aligned with your interests? There's a relatively simple way to check.

Neil Woodford © Shutterstock

It may be worth checking whether fund managers and directors invest in their own funds

Are the interests of the finance professionals managing your money properly aligned with your interests? The more skin you have in the game as a fund manager, the greater your interest in providing a positive outcome for the investor.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

That, at least, is the theory behind the regular research into investment trusts produced by Alan Brierley at Investec. Brierley (rightly, in my view) reckons that a manager heavily invested in their own fund will take a more direct interest in the outcome of that investment strategy. The same should apply to the non-executive directors, who are paid a fixed fee for looking out for investors' interests.

Skin in the game...

The good news is that more and more managers and directors are putting their money into their own funds. Investec's latest study of 303 investment companies reports total aggregate investment by boards and managers of £3.39bn.

Advertisement - Article continues below

But the report also identified 20 chairpersons (6% of those featured) with no investment in their trusts. In the case of 30 investment companies, the aggregate shareholdings of the board were worth less than the total fees received over six months. And 41 chairpersons who have been on the board for at least five years currently have a shareholding worth less than their annual fee.

For me the key measure is how much of their own money fund managers are willing to stake on the success of the fund. Among investment trusts there is an elite core of funds where the managers are by far the biggest investors in the fund.

Notable examples include the Rothschild family in RIT Capital (£703m), and the management teams of Pershing Square (£668m), Tetragon (£257m) and Apax Global Alpha (£194m).

Another key gauge is what proportion of the managers' total wealth is tied up in a fund (or range of funds provided by the manager). On this score the Investec team cites the example of Simon Barnard, manager of Smithson Investment Trust, who told the fund researchers that 90% of his investable wealth is in this fund.

Nonetheless, just because the manager is aligned doesn't mean that one can avoid poor investment outcomes. Neil Woodford was heavily invested in his Patient Capital fund, which also guaranteed that payments would only be made if the fund outperformed a benchmark. Yet none of these alignments did anything to halt the fund's subsequent meltdown.

... isn't always a bullish sign

It's a similar, though less dramatic, story at other funds. The Investec team highlight two other funds in particular Boussard & Gavaudan and JZ Capital Partners "where the management teams have investments of £129m and £100m. In both cases, the performance records are nevertheless poor". If we look down the list of biggest absolute holdings, Pershing Square, Tetragon, Boussard and Gavaudan and JZ Capital Partners all appear near the top. But all have produced less than stellar returns over the past five years.

Advertisement - Article continues below

This all suggests that rather than focusing on the absolute size of the investment in the fund we should look at the relationship between the managers' skin in the game and their fees, as it gives us a rough idea of how much of their own pay they seem willing to match with their own invested cash. In this context, it's interesting to note that there are some trusts where all board members have a current shareholding worth more than two years' fees.

They are Aberdeen Standard Equity Income; Mid Wynd International; AVI Global Trust; Baillie Gifford US Growth; Smithson Investment Trust; Dunedin Enterprise; Supermarket Income Reit; Independent Investment Trust; Troy Income & Growth; LXI Reit; and OLIM's Value and Income Trust.




The power of mean reversion

When it comes to investing in funds, don’t chase the top performers – look for the cheapest ones.
1 Apr 2019

The most important number to look at before you buy any fund

Many investors get distracted by past performance when they buy a fund. But there’s something else to consider that will have a much bigger influence …
22 Mar 2019
Investment strategy

Buying shares can be a tricky business

A tip gone bad reminds John Stepek that buying shares in troubled companies in the hope that they can turn themselves around doesn't always pay off.
16 Jan 2020

Investment trusts: the Cinderella of investment arrives at the ball

Investors should look beyond the market noise of a single year and examine the bigger picture. Max King explains what we can learn from 25 years of in…
8 Jan 2020

Most Popular


Currency Corner: how is the New Zealand dollar doing against its US counterpart?

The New Zealand dollar has been doing well against the US dollar in recent months, but has started to wobble a little. Is it still a buy? Dominic Fris…
20 Jan 2020
Share tips

India’s small and mid-cap stocks are set for big gains – here are three to buy now

Each week, a professional investor tells us where he’d put his money. This week: David Cornell of the India Capital Growth Fund highlights three favou…
20 Jan 2020
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020