Asking your fund manager if they invest their own money in the fund they manage is one of the most important questions you can pose.
This is called having “skin in the game”. As an investor, knowing if a fund manager has their own money in their fund is a good way of checking that their interests align with your own.
The idea of investing in firms where the bosses are invested has been a popular buying choice over many years. Warren Buffett increased the popularity of skin in the game and has successfully used it as one of his own investing philosophies.
Fund managers with skin in the game may be more motivated
Talented fund managers with a stake in their own investment fund may be more motivated. With their own money invested alongside yours, they are more likely to act in the long-term interests of you and other investors. The chance of them taking excessive risks for short-term gain is also reduced.
However, while having skin in the game can be a sign of aligned motivation, it could cause a fund manager to take too much, or not enough, risk.
The risks the fund manager takes – or fails to take – could be a result of their own objectives, and not yours. Ultimately, this could harm the returns you see on your investment.
Investing with a manager who is investing their own money in the fund can boost confidence
Investing in a fund managed by someone with their own money in the fund can provide additional confidence as you know they will be motivated to do a good job.
When investors gain, so too does the manager. Likewise, if the investors lose, the manager will also suffer financial loss.
Is a manager always allowed to invest in their own fund?
While a manager may invest in their own fund or trust, there are different ways of doing so and there may be some restrictions as to what is allowed.
Of course, sometimes it’s not possible for a manager to invest in their own fund. This could be because the fund doesn’t fit their own investing needs, or their assets are invested elsewhere (in the shares of their investment firm, for example).
There are also much more straightforward reasons for not being invested in their own fund. They may have large bills to cover. Paying for things like school fees or maintaining a large house might mean they don’t have cash to invest.
Getting hold of information about whether the fund manager invests their own money in the fund
Getting to know whether a manager invests in their own fund isn’t always possible. It’s not the kind of information included in a fact sheet.
Ultimately, as it’s personal information, it’s up to the fund manager whether they publicise the fact they have money invested in their fund or not.
It’s worth reading the fact sheets, along with any additional commentary or interviews you can access as, somewhere along the line, they may have mentioned if they are invested in their fund.
88% of investors believe it should be mandatory for fund managers to disclose if they invest in their own fund
In June 2021, Interactive Investor carried out a survey asking what their website visitors thought about fund managers having skin in the game.
Of 1,800 respondents, 88% said it should be mandatory for fund managers to disclose whether they invest in the fund they manage.
77% said they would be more likely to invest in a fund or investment trust if they knew the manager was invested in it. 23% of these people said they didn’t know how to find this information out.
There are calls for more transparency
In the UK, investors interested in this issue are usually only able to find out if fund managers choose to be open about it. There is no transparency, reporting obligations, or frameworks on this issue for private investors.
However, investment trusts, or closed-ended investment companies, have non-executive boards of directors who must disclose their shareholdings in annual reports and accounts. Market rules also require director dealings to be published.
Although the same obligations don’t apply to fund managers of listed investment companies, anyone with a substantial holding must report this to the market. For UK-listed investment companies, the threshold starts at 3%. This would also apply to fund managers of investment companies with very large stakes.
In the US, the Securities and Exchange Commission (SEC) 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”.
In the UK, there are calls for the Financial Conduct Authority to address the transparency gap, to ensure investors can make better-informed decisions.
At Bowmore, we invest our own wealth the same way we invest our clients’ money
We feel there is no better way to ensure that our interests are aligned with those of our clients than by investing our personal wealth in exactly the same way as we invest our clients’ wealth.
Without exception, the Bowmore directors have their own portfolios managed by Bowmore Asset Management. We practise what we preach and only recommend portfolios that we are 100% happy to invest in ourselves.
Get in touch
To find out more about how Bowmore work and how we can look after and grow your wealth, email us at firstname.lastname@example.org or call 0203 617 9206.
The value of your investments can go down as well as up, so you could get back less than you invested.
Past performance is not a guide to future performance.
Bowmore Asset Management Ltd is authorised and regulated by the FCA