Putting their money where their mouth is

On the principle that turkeys don’t vote for Christmas, would you put money into an investment fund where you know those in charge have parked their own cash elsewhere? Probably not, at least without a very convincing explanation. And happily, in the investment companies sector, this is something we can very easily check – directors of investment companies are legally obliged to declare their shareholdings in their funds.

You can do this for yourself by taking a look at the most recent annual report of any investment company. But at an industry-wide level, the exercise is also revealing; the analyst Investec has just published its Skin in the Game report into directors’ shareholdings at almost 300 funds and the findings are striking.

The big picture is that only 7% of investment company directors have no personal investment in the funds on whose boards they sit (excluding those directors appointed in the past year, who may not yet have declared their investments or had time to make them). There are only seven chairs in the same position.

In some cases, moreover, directors’ stakes are very significant. More than 50 directors have investments in their funds worth in excess of £1m; for some, the figures run into tens or even hundreds of millions. Even larger numbers own stakes that are worth more than the fees they expect to earn from their board roles over the next six months.

The interests of investment company directors, in other words, are very often closely aligned to those of other shareholders in their funds. If something goes wrong at these investment companies, it won’t only be ordinary investors who suffer. Directors therefore have every reason to hold investment company managers to account.

As for managers themselves, Investec also collects information on their shareholdings. This data is patchier since managers only have to declare stakes worth more than 3% of the company, but what we do know is encouraging. For example, there are at least 89 managers or management teams with investments in their own funds that are currently worth more than £1m; that includes 39 with stakes valued at more than £10m.

Overall, the total declared value of investments held by directors and managers in their funds comes to around £4.2bn. That’s up from £687m in 2010, when Investec first began conducting this research. Even allowing for asset growth over the past 12 years, that seven-fold increase looks pretty remarkable.

Naturally, none of this guarantees an investment company will deliver the performance that investors hope for. There are even analysts who worry that managers with too much of their own cash tied up in the fund may be too risk-averse – or even too gung-ho – because of their personal exposure. Others point out that where directors own a very large proportion of the fund’s equity, minority investors are vulnerable to abuses of power.

Nonetheless, most investors will feel more comfortable knowing that investment company directors and managers are personally impacted by the success or otherwise of their funds. Too often in financial services, providers act as disinterested middlemen, earning their fees irrespective of whether they deliver a decent outcome.

That’s not always the case. It may well be that there are many open-ended funds where managers also maintain significant personal investments. But since there is no obligation to declare such holdings, we can’t be sure how widespread this is, or what the situation is at a particular fund. With investment companies, shareholders always know when their number includes the directors – and often about their managers too