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

Neil Woodford invested his own money in his Patient Capital Trust

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.

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.

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.

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.

Recommended

I wish I knew what a share buyback was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what a share buyback was, but I’m too embarrassed to ask

A share buyback means just what it says – a company buys back its own shares. But why? And how does that benefit shareholders?
3 Aug 2021
Where to find data on investment funds
Funds

Where to find data on investment funds

Investors can choose from a wide array of websites offering financial information about funds. Where should they start?
3 Aug 2021
Inheritance tax planning: using Aim shares to cut your inheritance tax bill
Inheritance tax

Inheritance tax planning: using Aim shares to cut your inheritance tax bill

If you have invested in companies listed on London’s Aim market, you can use them to reduce your inheritance tax bill, says David Prosser. Here’s how.
2 Aug 2021
Premium Bonds: a better bet for savers when interest rates are low
Savings

Premium Bonds: a better bet for savers when interest rates are low

Cash is a dull investment with interest rates near zero – but there is one way to make it more exciting without risk
2 Aug 2021

Most Popular

Why the UK's 2.5% inflation is a big deal
Inflation

Why the UK's 2.5% inflation is a big deal

After years of inflation being a financial-assets problem, it is now an “ordinary things” problem too, says Merryn Somerset Webb. But central banks st…
16 Jul 2021
The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism
Economy

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism

Russell Napier talks to Merryn about financial repression – or "stealing money from old people slowly" – plus how Asian capitalism is taking over in t…
16 Jul 2021
Three companies that are reaping the rewards of investment
Share tips

Three companies that are reaping the rewards of investment

Professional investor Edward Wielechowski of the Odyssean Investment Trust highlights three stocks that have have invested well – and are able to deal…
19 Jul 2021