The fund managers and boards with the most skin in the game

There are few better guarantees that a fund manager or director is acting in your best interests than by having a significant personal investment, but the disclosure requirements leave a lot to be desired. 

Investment trusts are much more transparent than their open-ended counterparts as they have non-executive boards of directors, who have to disclose their shareholdings in the annual accounts, while the market rules also require that director dealings are published. Unfortunately the regulations are less stringent for the fund managers, as they only have to report substantial shareholdings above a three percent threshold. 

There is far less information available for open-ended funds such as OEICs where investors tend to be reliant on whether or not fund managers choose to be open about it. In the US it is a very different situation, as the regulator requires managers to disclose how much they invest in their own funds so as “to help investors assess the extent to which the portfolio manager’s interests are aligned with theirs”.

The latest report into this area by Investec has found that the aggregate investment of boards and managers in their own investment trusts is £4.81bn, a sevenfold increase on the total of £687m they identified in their first report in 2010. 

Significant skin in the game

Those with the most at stake include the £1.32bn shareholding of the management team of Pershing Square Holdings (LON:PSH) and the £834m investment by the Rothschild family in RIT Capital Partners (LON:RCP). In addition, there are a further 51 chairmen/directors and 78 management teams with holdings worth more than one million pounds, with some of the most notable examples being Tetragon Financial (LON:TFGS), Apax Global Alpha (LON:APAX) and Scottish Mortgage (LON:SMT). 

At the other end of the scale there are eight percent of chairmen/directors who were appointed in 2019 or before that are yet to make any investment whatsoever, although some are prevented from doing so for regulatory or tax reasons. This lack of commitment is not a great sign for investors. 

Alan Brierley, director of investment companies research at Investec, says that they 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,” says Brierley. “However, while board directors are required to disclose ownership and transactions it is disappointing that some managers remain reluctant to do so.”  

Crossing the line

There have been a few instances where significant stakes have given the managers too much power and in some cases the problems have been compounded by poor corporate governance. One such is JZ Capital (LON:JZCP),where at one time two of the managers had more than £100m invested, yet this didn’t stop them from making a series of unsuccessful strategic initiatives that have contributed to the poor returns according to the report.

Another example is Boussard & Gavaudan (LON:BGHS), where there has been a clear mismatch between the long-term performance record and its high fees. This has led Investec to question the strength of the board to act in the shareholders’ best interests. 

Most investors would find it useful to know how much a manager has invested in their own fund, yet the current disclosure requirements are patchy and incomplete. Tighter rules along the same lines as those in America would even up the playing field and allow us to make more informed investment decisions, but there doesn’t seem to be much chance of this happening any time soon.