While being a proponent of fund managers investing in their own funds, Emeil van den Heiligenberg, head of asset allocation at LGIM, has warned of the risks of going “all in” when it come to the heated topic of having ‘skin in the game’.
In April this year, the Securities and Exchange Board of India (SEBI) mandated that key employees of asset managers invest about 20% of their salary in the schemes they run or oversee.
This direct order to fund managers to have what has been known as having “skin in the game” has triggered a wider debate as to how much managers of funds should have invested in those portfolios they run.
According to last year’s ‘Skin in the Game’ report compiled by Investec Securities – which focuses on investment trusts – only a fifth of all fund managers of investment companies on the London Stock Exchange held a significant stake in their own funds.
Additionally, van den Heiligenberg said that a “stunning” 16% of trust board members had no personal investment in the fund. Indeed the report noted: “This lack of investment does not sit easily with the degree of commitment expected by most shareholders.”
A game of diversification
So what are the pros and cons of managers investing in their own funds?
“For me, backing my own funds is an easy decision,” said van den Heiligenberg. “I work in multi-asset portfolios and my funds, by definition, aim to be well diversified and are aimed at different risk profiles. For most risk appetites, time horizons and investment objectives, there should be a suitable fund available.”
But van den Heiligenberg admits this benefit of diversification is not a luxury afforded to those fund managers in individual asset classes. So, is it right that a manager of a European equity fund should have as much of their wealth invested in one asset class as a manager of a multi-asset fund, just to appease the regulators?
“The flip side of skin in the game, or going ‘all in’ on your own fund, is that it flies in the face of diversification,” said van den Heiligenberg. While admitting this is true, he added the sense of being exposed to success and failure is exactly what defines the alignment of interest between fund managers and clients.
“At some moments in time, it might hurt a little and the fund manager might feel exposed, but that’s intended – and they are feeling the same pain as their clients,” he said.
At the same time, van den Heiligenberg added that if a manager has too much of their own wealth invested in their own fund, there is the danger it can lead to behavioural biases slipping into their investment approach.
“The idea is that in the heat of a crisis, a fund manager might be less ‘cold and calculated’ when his or her personal money is at stake,” he said. “I think every manager feels some ‘career risk’ during a crisis, irrespective of whether they have personal money at stake.”
For van den Heiligenberg, a manager’s experience and investment process should help mitigate this.
“Veteran fund managers should have learned to recognise increased stress levels and mitigate the behavioural impacts by drawing on their experience and by sticking to a proven process,” he said.
Taking all the considerations into account, van den Heiligenberg’s overall conclusion is that he is a proponent of fund managers having skin in the game.
“Something similar to the SEBI rules could align interests, help with trust between clients and fund managers, and might help to improve the confidence of investors in the financial industry,” he said.