Having skin in the game

One of the claims often made about closed-ended funds is that their company structure protects investors in a way that other types of fund do not. But while investment companies do indeed have independent boards with a legally-binding duty to act in the best interests of shareholders, how can we be sure they will actively exercise that duty?

New research from Canaccord Genuity provides a healthy chunk of reassurance on that question.  It reveals that more than eight in 10 investment company directors have shareholdings in the funds on whose boards they serve. In other words, their interests are directly aligned with the shareholders they represent.

Canaccord Genuity has been conducting this research regularly for several years and reports that the number of directors with “skin in the game” has steadily increased. This year, just 14 per cent of directors have no holding in the trusts they’ve served (or 9 per cent if you take out directors appointed in the past year), which is down from 19 per cent in 2012.

Of course, the fact that a director has an investment in the trust too is no guarantee that shareholders can look forward to superior performance. But it surely does mean that investors can expect their interests to be safeguarded more carefully. Every time the board discusses, say, performance or charges, directors have a feel for the practical impact of their actions, rather than operating at a hypothetical level.

All the more so at investment companies where the value of a director’s shareholding is larger than the fee the fund is paying them. This is now the case at 17 per cent of investment companies, Canaccord Genuity reports. It found more than 20 funds where every single director had a shareholding that was worth more than the annual fee they received from the company.

The research also includes some findings on the investments of investment company fund managers in their own funds, though there is no legal requirement for this information to be disclosed, so it is harder to come by. It suggests such investments have continued to increase in both number and value, which is also good news for investors. More than 60 managers have stakes in their own funds that are worth more than £1m.

The analyst’s own take on the research is unequivocal. “Investors look for directors and managers to have a meaningful personal investment in the companies which they direct and manage,” the analyst concludes. “We have never met one investor who has argued against this, and we strongly believe that skin in the game sends a clear and powerful message to both existing and potential investors.”

It’s difficult to disagree with this argument. The investment management industry is often criticised as being run for the benefit of the people it employs, rather than the end investor. In the case of investment companies, however, those two groups intersect and their interests are therefore aligned.

One final thought. Canaccord Genuity says women now account for 22.3 per cent of all investment company directors, up from 10.2 per cent in 2012. That’s good progress and it’s important if you believe the board of a business should look like the customers and investors it serves. Still, there are still 69 investment companies run by all-male boards. There is plenty of work to do.