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Skin in the game

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30 August 2019

David Prosser asks the all-important question, does your fund manager invest in their own portfolio?

Does your fund manager put his (or her) money where their mouth is? With Nick Train’s Finsbury Growth & Income trust having just announced plans to raise as much as £550m from new share issues over the next year, some investors will no doubt be wondering whether the fund, whose shares consistently trade at a premium to the value of its underlying assets, is too highly valued. In which case, the recent disclosure that Train spent £2.4m of his own money buying shares in the fund last year might be reassuring.

In fact, the investment company sector has a proud tradition of fund managers putting their own money into the vehicles they run. Indeed, research published last year by the broker Canaccord Genuity found the amount invested in funds by the managers running them and the directors of their boards had more than trebled over the previous six years.

By April 2018, investment trust directors and managers had holdings worth £2.04bn in funds for which they were responsible, Canaccord Genuity found, compared to only £687m in 2012. Fewer than one in 10 directors who had been in their roles for more than a year had no stake at all in their funds. And while comparable figures for managers aren’t available, since funds don’t have to report this, the broker found no fewer than 67 investment trusts where the management teams had stakes worth more than £1m.

This is not to suggest that funds where managers and directors take a personal stake are guaranteed to outperform those not backed in the same way. Here, the evidence is sketchy. One study, published by Capital Group in 2014, did find that manager ownership and cost were the two characteristics most strongly correlated with improved returns over 20 years of US mutual fund data, but the data is not compelling – and there are no equivalent UK studies.

In theory, however, the idea that your fund managers’ personal interests are aligned with your own is attractive. All too often in financial services, that isn’t the case, with advisers and product providers benefitting irrespective of whether clients get good results – or even seeming to profit at their expense.

There are counter arguments. Could a manager with a very large stake in a fund be distracted by personal interests – perhaps becoming too conservative or adventurous, for example? And if the fund is their only interest, does this suggest scant regard for the principles of diversification given they’re dependent on it too for earning a living?

Still, at the very least, the fact that a manager has “skin in the game” is a signal to investors that they are confident of the fund’s prospects, particularly where they have increased their stake.

This is not to suggest that Nick Train will deliver the goods at Finsbury Growth & Income, or that investors should take part in his share issues. Still, this is a manager who is on record as rejecting valuation as a useful investment criterion – you might take that as a convenient argument given the premium rating of his own funds, were it not for the fact that he has been investing so much of his own money.

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