Interactive Investor

Ian Cowie: fund managers should fess up ‘skin in the game’

17th June 2021 10:03

Ian Cowie from interactive investor

Fund managers should share investors pleasure – or pain – when things go well or wrong.

Self-interest is the only motivation you can usually rely on. Everything else is altruism, socialism or some other theory which doesn’t work in practice.

That’s why this shareholder seeks investment trusts where fund managers and boards of directors have a substantial sum of their own money at stake. This means they should share our pleasure - or pain - when things go well or wrong.

It is also why I support interactive investor’s campaign for British regulators to follow the American practice of requiring fund managers to ‘fess up to whether or not they have any ‘skin in the game’. Put another way, Richard Wilson, chief executive of interactive investor, points out: “This transparency gap needs to be addressed by the Financial Conduct Authority (FCA) for the benefit of investors in the UK, to ensure they can make better-informed decisions.

“Retail investors deserve better disclosure and treatment - it is just good governance. They should be given the critical information required to decide if those who eat their own cooking are indeed better cooks.”

Sad to say, I do not expect a prompt or positive reaction from the sleepy watchdogs at the FCA. The regulators are in no rush to tell us which fat cats don't put their money where their mouth is.

Such full disclosure might shock many investors because it will show us why many directors and fund managers remain amply rewarded for failing to provide much - if any - outperformance. All too often for professionals in financial services, it’s a case of heads they win, tails the punters lose.

On a brighter note, research by investment trusts analyst Investec Securities offers us the chance to see which investment trust boards of directors have investments in their own trust’s shares and compare this with the annual fees they receive. Of course, skin in the game is not a guarantee of great performance - or that the lack of it leads to rotten returns - but correlation can often be seen; for good or ill.

Coming down from the clouds, several extreme examples jump out of my own modest portfolio. Step forward, Worldwide Healthcare Trust (LSE: WWH) where all seven directors hold shares worth more than their annual fees from this £2.5 billion trust. No wonder, either, after returns over the last one, five and 10-year periods of 12%, 119% and 465%, according to Morningstar.

Full disclosure: although the short-term numbers are not great, the medium and long-term returns remain fabulous. WWH is one of my top 10 holdings by value, after more than a decade of ownership.

It is also fairly typical of my ‘forever fund’ where, elsewhere, all the directors of Aberdeen Standard European Logistics Income (LSE: ASLI) and Jupiter Emerging &  Frontier Income (LSE: JEFI) have shareholdings greater than their annual fees and a majority of the directors at most of the other trusts put in more than they take out.

At the other end of the spectrum, it is perhaps no surprise to find that the directors of the duds in my portfolio tend to shun the shares. Skulking in this list of shame are BlackRock Latin American (LSE: BRLA), Henderson Far East Income (LSE: HFEL) and US Solar Fund (LSE: USF).

All three underperformers have boards of directors where most of them are paid more in fees than they invest in their own trusts’ shares. For example, only one in five directors at BlackRock Latin American has an investment value greater than his or her annual fee. Well done, Craig Cleland; at least you are sharing my pain.

Similarly, only two out of five directors at HFEL have put more money into this trust than they take out each year. No wonder, you might think, when it is bottom of its Association of Investment Companies (AIC) sector over the last one, five and 10-year periods, as reported here recently.

One cheer for Henderson Far East Income chairman, John Russell, who is leading by example with £229,000 of his own money. He also spent some time answering this shareholders’ questions about why we might hang on in hope and I intend to report this when news flow allows.

Finally, among this terrible trio, none of the four directors at US Solar Fund has an investment value in this fund that is as much as the annual fees they are paid; one appointed last year has no money invested in USF at all. That’s a pity because this shareholder hopes this green fund has a bright future.

One reason USF’s share price might be under a cloud is that, while Morningstar via the AIC states its yield is 5.4%, a well-known pink trade paper says USF pays investors just 2.7%.

It’s all rather confusing. Perhaps if USF directors had more of their own money at stake they might stir themselves to sort this out for the benefit of prospective and existing investors.

Is it too much to ask for an investment trust’s directors to care as much as its shareholders? Are we all in this together or not?

Ian Cowie is a freelance contributor and not a direct employee of interactive investor. 

Ian Cowie is a shareholder in Aberdeen Standard European Logistics Income (ASLI), BlackRock Latin American (BRLA), Henderson Far East Income (HFEL), Jupiter Emerging & Frontier Income (JEFI), US Solar Fund (USFP), and Worldwide Healthcare Trust (WWH) as part of globally diversified portfolio of investment trusts and other shares.

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