What does Terry Smith and Nick Train have in common? They have ‘skin in the game’, having invested their own money in the funds they run.
This is a phrase that you can expect to hear a lot more this year. Momentum is building behind the campaign to compel all managers of funds and trusts to reveal whether they are risking their own cash alongside yours – and if not, why not?
At present, you have no right to this information, an unjust state of affairs that the Interactive Investor platform wants the watchdog Financial Conduct Authority to end.
Terry Smith (above right), the Fundsmith manager, asserts: ‘Who would trust a chef who wouldn’t eat his or her own cooking?’
For the moment, the lack of publicly available data means there is no evidence that managers who invest in their own funds produce better results, although it seems common sense that this should be as a powerful incentive to excel.
Whatever your view, a new age of openness is likely to dawn sooner rather than later.
Company bosses must buy shares in their businesses and see their dealings published. Why should fund managers be spared the need for such transparency?
Most private investors would probably be happy with the US system, under which managers’ stakes are detailed in bands ($1– $10,000, $10,001–$50,000 and so on). In addition, Ben Yearsley of Shore Capital suggests that when managers receive bonuses in the shape of units in the fund, these should be reinvested for a period of three to five years.
But should you see this drive as the spur to reassess the way in which you select funds?
Investment trusts must already provide details of the holdings of their non-executive boards, figures which demonstrate that, in some cases, directors’ and investors’ interests are scarcely aligned. As the new Skin In The Game research by Ben Newell and Alan Brierley of Investec highlights, the combined stakes of 24 boards are worth less than six months-worth of the fees they collect, for example. Nice work if you can get it.
This study also details managers happy to commit their own cash to their trusts. They include teams at Baillie Gifford’s UK Growth, US Growth, Monks and Scottish Mortgage trusts, Paul Niven at F&C, Terry Smith at Fundsmith Emerging Equities and Nick Train (above left) at Finsbury Growth & Income and Lindsell Train (a separate Lindsell Train vehicle, the UK Equity fund, has a holding in Daily Mail & General Trust).
I’m an investor in Scottish Mortgage, but also in Fundsmith and Fundsmith Emerging Equities on the basis that, as Darius McDermott of Fund Calibre puts it: ‘I wouldn’t definitively avoid a fund where the fund manager didn’t have a stake. But my greater preference would be for one where the manager’s interests are aligned with those of investors.’
Last year, the advantages were illustrated by the lucrative returns from Pershing Square Holdings, the £7.5billion FTSE-quoted trust with its bets on such recovery stocks as Hilton and Chipotle, the takeaway chain. The trust’s manager is the US activist investor Bill Ackman, who has £1.3billion in the trust, together with his team.
Anyone who decides to back Ackman now must believe in the potential offered by his latest deal, described as ‘intriguing’ by Numis, the brokers.
Pershing Square Holdings has a 15 per cent stake in Tontine, Ackman’s special purpose acquisition company, which is spending $4.1billion on 10 per cent of Universal Music, the publisher behind Lady Gaga. But, for the time being, the trust’s shares stand at a stubbornly large 27 per cent discount to the value of its net assets – maybe because although Ackman and his squad may put their money in the trust, they also pick up high fees, at which some investors can balk.
As pressure increases to compel managers to show they have skin in the game, expect to hear the counter-argument that Neil Woodford sank a fortune into his funds but still betrayed his investors.
This assertion is less relevant than the danger that could arise from an over-reliance on Smith and other popular managers. For example, it’s easy to assume that Fundsmith is the equivalent of a diversified portfolio, but the UK represents just 7 per cent of this global equity fund.
As the latest Bank of America managers’ survey underlines, this is the market the professionals favour now. Rated funds and trusts include City of London and Lowland (where the managers have stakes) and TB Amati Smaller Companies. Meanwhile, the current controversy should provide some entertainment.
Just how will managers without a significant long-term personal commitment to their funds try to justify this choice, while hoping to retain your loyalty?
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