Should UK fund managers follow in the footsteps of the US and declare any personal stakes in funds?
by Andy Davis
We have just passed the 30th anniversary of British businessman Gerald Ratner’s notorious speech to the Institute of Directors in April 1991, when he described one of his jewellery firm’s products as “total crap” and joked that his cut-price earrings cost less than a prawn sandwich from Marks & Spencer and would probably not last as long.
Ratner’s brazen rubbishing of his own wares outraged his customers, who promptly deserted him. The company came close to collapse soon afterwards, and Ratner’s reputation never recovered. This is hardly surprising: customers do not respond well to being told they are idiots.
I was reminded of Ratner’s downfall when I read the recent call by Interactive Investor, the execution-only investment platform, for UK fund managers to disclose how much of their own money they invest in the funds they manage – ‘eating your own cooking’, as it is often described. Interactive Investor is right to highlight this issue. The lesson from Ratner’s debacle is that we expect businesses to stand behind the products they sell. If they don’t, it is perfectly reasonable to ask why. Most of us would think twice about dining at a restaurant if we knew the chefs never touched the food.
Ratner’s brazen rubbishing of his own wares outraged his customers, who promptly deserted himTo be fair, some high-profile fund managers are well known for having large stakes in the funds they run. Big names such as Terry Smith of Fundsmith, Nick Train and Michael Lindsell of Lindsell Train, James Anderson and Tom Slater at Baillie Gifford and – of course – Warren Buffett at Berkshire Hathaway in the US clearly see having ‘skin in the game’ as a valuable way to demonstrate their good faith to investors.
Other countries already insist on transparency about fund managers’ personal stakes in the funds they run. In the US, as Interactive Investor pointed out, the US Securities and Exchange Commission requires fund managers to declare their holdings because it helps investors to judge how closely the manager’s interests are aligned with their own. The disclosures are made in bands rather than exact amounts.
There are plenty of precedents for this elsewhere in the financial world. Investors in individual companies frequently like the top executives to have large personal stakes because it shows they are sharing the risks that their investors are exposed to. By the same token, founders who sell large blocks of shares when they list their company on the stock exchange frequently attract negative comment.
Some make this alignment of interests their fund’s chief selling point. RIT Capital Partners (which manages part of the Rothschild family fortune) is one of several investment trusts that manage large pools of capital for a wealthy family but list on the stock market so that anyone else can invest alongside the family by buying shares in the trust. In this instance, a fund dominated by a legendary banking dynasty allows outsiders to benefit from the family’s financial acumen and access to deals. Away from the public markets, investors in private equity funds usually insist that the general partners who manage them commit large sums of their own money to the fund.
Regulation to require disclosure by fund managers of their personal holdings is sensible, but not enough
Should regulators force the managers of UK retail funds to do what the executives, who run companies and the managers of private equity funds, already do voluntarily?
Considering the question in these terms gets us closer to the heart of the matter. The real issue here is how directly accountable fund managers are to their investors. Large institutions with massive sums to deploy can meet company executives and general partners whenever they like and make their wishes clear. Small, retail investors have no such access and therefore no way to ask fund managers how much of their own capital they are putting at risk in their fund.
Regulation to require disclosure by fund managers of their personal holdings looks like a sensible response. But on its own it is not enough.
Insisting that fund managers give their investors regular opportunities to hear them present their recent performance and answer questions would do far more to improve accountability and ensure that interests are aligned. This is already happening voluntarily among smaller companies, thanks to the rapid growth of online platforms, such as InvestorMeetCompany and others. These allow retail investors to see the same presentations that the companies give to institutional investors and often on the same day, and to put questions to the management team.
This level of access is a massive step forward for smallcap investors. The same should be expected of the people who manage investment funds. Declaring once a year how much of their own money managers have invested in their fund would be a start. But add in some genuine transparency and the requirement to take questions in public and account for performance and you have a recipe for much better alignment and accountability. Perhaps a company such as Interactive Investor might see an opportunity in all this?