Calls for fund managers to be open about ‘skin in the game’

Interactive Investor calls for rules requiring fund managers to say how much of their own money is invested in the funds and investment trusts they run.

Stockbroker Interactive Investor has called for new rules to force fund managers to say how much of their own money is invested in the funds and investment trusts they run.

Richard Wilson, chief executive of the UK’s second largest direct-to-consumer sharedealing platform, has written to the Financial Conduct Authority (FCA) and Financial Services Consumer Panel, calling for the introduction of measures similar to those in the US, requiring stockpickers to come clean about their ‘skin in the game’.

The letter follows a survey of 1,800 investors showing that nearly nine out of 10 (88%) believe it should be mandatory for portfolio managers to disclose whether they invest in their own funds.

Nearly eight out of 10 (77%) said they would be more likely to invest in a fund if the manager was personally invested, while almost one in four (23%) said they had no idea how to find out that information.

Wilson said private investors deserved ‘better disclosure and treatment’. ‘We believe this transparency gap needs to be addressed by the FCA for the benefit of investors in the UK, to ensure they can make better-informed decisions,’ he said.

Currently, investors largely have to rely on whether fund managers choose to be open about the issue. Annual general meetings where investors can quiz managers on such issues are rare for open-ended funds, although Terry Smith’s Fundsmith Equity is a notable exception.

Moira O’Neill, Interactive Investor’s head of personal finance, said the structure of investment trusts means more information is available, but improvements could be made there too.

‘Who wouldn’t want to know whether their fund manager eats their own cooking? The answer is not many, and our research backs this up loud and clear. It is generally only journalists or investment analysts who are in the privileged position to ask these difficult but important questions,’ she said.

‘Investment trusts have a clear edge over funds in this respect, although it is the non-executive directors who are on the radar here. It’s time to turn the heat on fund managers too,’ she added.

Directors on the boards of listed investment companies have to disclose their shareholders in annual reports and accounts, while market rules require that director dealings are published too.

While the portfolio managers of closed-ended funds are not under the same obligation, anyone with a substantial holding does have to report this to the market. For London-listed investment companies the threshold starts at 3%, so would apply to stockpickers with very large stakes.

Investec compiles an annual report pulling the available information together, but Alan Brierley, director of investment companies research, said he would welcome a rule change requiring fund managers to be more transparent.

Brierley said: ‘We strongly believe that personal share ownership sends a clear and powerful message to both existing and potential investors. Since our first “Skin in the Game” report in 2010, it has become the accepted norm for boards and managers to have a meaningful personal investment in companies that they represent.

‘However, while board directors are required to disclose ownership and transactions it is disappointing that some managers remain reluctant to do so. Here, we would welcome greater transparency.’

Interactive Investor said disclosure rules in the US, designed ‘to help investors assess the extent to which the portfolio manager’s interests are aligned with theirs’, provided a good model.

The Securities and Exchange Commission, which regulates markets in the US, requires fund managers to disclose their financial interest by band, rather than the precise amount. In its letter, Interactive Investor calls this ‘sensible and proportionate’. The current bands are: none; $1–$10,000; $10,001–$50,000; $50,001–$100,000; $100,001–$500,000; $500,001–$1m; and over $1m.

Investec’s latest ‘Skin in the Game’ report on investment companies has just been published. We will report on it shortly.

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