It is 33 years since Harry Enfield’s ‘Loadsamoney’ novelty song spawned a single, a sold-out live tour, and had left-leaning commentators referring despairingly to the ‘loadsamoney’ 1980s’ mentality.
Today, those ‘loadsamoney’ characters have had to tone things down. Few people want to talk about their personal finances, least of all brag about them. At least not overtly.
And so, one of the most awkward questions that journalists and investment analysts can ask a fund manager is whether they have skin in the game – is their own money invested in the fund that they manage, and, even more awkward, how much? But it is not asked for the sake of a cheeky ‘journey into money’ or crass ‘how rich are you?’’.
It is a legitimate question that needs to be asked due a regulatory transparency gap that we believe needs fixing.
Over the past several years, the Financial Conduct Authority has led some important initiatives to improve transparency of collective investments, particularly when it comes to charges.
But the UK falls short on the issue of fund manager ‘skin in the game’ and compares unfavourably with the US. The US Securities and Exchange Commission requires fund managers to disclose how much they invest in their own funds, “to help investors assess the extent to which the portfolio manager's interests are aligned with theirs”.
And UK retail investors say the same requirement should apply here.
An interactive investor survey of 1,800 website visitors between June 2 and 4 2021 revealed that 88 per cent said it should be mandatory for fund managers to disclose whether they invest in the fund that they manage.
77 per cent said they would be more likely to invest in a fund or investment trust if the manager is personally invested in it and of these, 23 per cent said they had no idea how to find this information out.
Investors interested in this issue tend to be reliant on whether fund managers choose to be open about it.
Terry Smith is one of the few open-ended fund managers prepared to stand up and be counted on this issue. He has gone on the record not only on his own skin in the game, but also by saying fund managers more generally should disclose their financial interest in the funds that they manage.
Not everyone agrees that fund managers should invest in their own funds. Among our own sample, 85 per cent said it aligned fund manager interest with their own, while only 11 per cent said it could create a conflict of interest and encourage fund managers to take either too little or too much risk.
We strongly believe investors have a right to know whether fund managers eat their own cooking, in the same way that non-executive directors of listed investment companies are required to disclose this information.
UK open-ended funds compare unfavourably with listed closed-ended investment companies (often referred to as investment trusts). This is because investment companies have non-executive boards of directors, which must disclose their shareholdings in annual reports and accounts, and the market rules also require that director dealings be published.
While the same obligations do not apply to fund managers of listed investment companies (the people responsible for the day-to-day running of the fund), those with a substantial holding do have to report this to the market, and for UK listed investment companies the threshold starts at 3 per cent. So this would also apply to fund managers of investment companies with very large stakes.
The transparency is by far superior in the closed-ended sector versus the open-ended funds sector. Even with very large stakes, fund managers of open-ended funds are only obliged to report their stakes in the funds they manage internally.
We believe there is scope for better disclosure of fund manager holdings, in an easy-to-find format, when it comes to both investment trusts and open-ended funds.
Alan Brierley, head of investment companies research at Investec, agrees: “While board directors are required to disclose ownership and transactions it is disappointing that some managers remain reluctant to do so. Here, we would welcome greater transparency.”
A fund manager having skin in the game will not be a guarantee of success. And it can have downsides – in his latest Skin in the Game report, Brierley points to a couple of examples where too much skin in the game has had dire consequences. But that is another reason why disclosing skin in the game is just good governance.
Harry Enfield’s Loadsamoney song starts with ‘Oi you! Shut your mouth!’ Some investment management groups may want us to do the same. But the investment management industry has been far too quiet on this issue. We believe this transparency gap needs to be addressed by the FCA for the benefit of investors in the UK, to ensure they can make better-informed decisions.
Retail investors deserve better disclosure and treatment. They should be given the critical information required to decide if those who eat their own cooking are indeed better cooks. We have written to the FCA on this issue. And we will not stop there.
Richard Wilson is chief executive of Interactive Investor
