Skin in the game 2017

“If you don’t believe in yourself, no-one else will.” It’s a saying that financial advisers might like to bear in mind when choosing funds for their clients – if the manager of the fund isn’t backing himself or herself to succeed, are you comfortable trusting them with clients’ money?

This is an idea worth considering in the context of new research published this week by Canaccord Genuity into the extent to which investment company boards and managers have money in the funds for which they’re responsible. The research suggests a remarkably high number do – and in many cases very considerable sums – which offers some valuable reassurance.

Canaccord Genuity’s analysts looked at almost 300 investment companies, concluding that 90 per cent of directors in these funds had personal holdings. That included 61 directors whose holdings were worth more than £1m.

It’s difficult to make comparisons with the number of managers holding personal investments, since unlike directors, fund managers aren’t required to declare this information. Even so, Canaccord Genuity was able to identify 54 management teams who have holdings worth more than £1m in the funds they run, as well as many more with smaller stakes.

What does that mean for investors and advisers? Well, Canaccord Genuity’s analysts believe this data provides a crucial yardstick for anyone considering the merits of a fund.

“While no guarantee of superior performance, in order to align interests, investors look for directors and managers to have a meaningful personal investment in the companies which they direct and/or manage,” the analysts argue. “This is the unequivocal view of our clients, and we strongly believe that skin in the game sends a clear and powerful message to both existing and potential investors.”

You can see the argument. In an era when the financial services industry is often accused of prospering at the expense of its clients, many investors will be reassured by the idea that the people responsible for investing their wealth will personally suffer along with them if results disappoint.

The governance angle is a critical one here too. Investment companies are unique structures – no other collective fund has an independent board whose job it is to hold the manager to account on behalf of investors. But the structure only has value if the directors exercise that responsibility as they are supposed to; surely, where the board has its own money invested in the fund, investors can be more confident this will happen?

Happily, more and more people in the investment company sector buy this argument. When Canaccord Genuity first conducted this research in 2012, it found 14 per cent of directors had no investment in their funds; by 2014, that figure had come down to 12 per cent and it now stands at only 10 per cent. The value of the stakes held by investment company directors over the period has almost trebled; even allowing for investment company growth in recent years, that suggests many more directors are now investing heavily in their own funds.

As Canaccord Genuity rightly points out, none of this will guarantee superior performance. But advisers are entitled to ask investment companies – and other funds for that matter – some searching questions when management isn’t risking its own money. Above all, why should you put clients’ money at risk if the manager and directors aren’t confident enough to put their own cash on the line?