Private investors demand transparency, survey shows.
interactive investor, the UK’s second largest direct-to-consumer investment platform and number one flat-fee provider, today called for the introduction of rules requiring fund managers to say how much they have invested in the funds and investment trusts they manage.
interactive investor has written to the Financial Conduct Authority and the Financial Services Consumer Panel, calling for measures to be brought in similar to those in the US to increase transparency regarding ‘skin in the game’.
interactive investor’s letter follows a survey of 1,800 visitors to the interactive investor website showing that almost nine out of 10 (88%) say it should be mandatory for fund managers to disclose whether they invest in the fund that they manage. The survey was conducted from 2 to 4 June 2021.
77% of investors 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% said they had no idea how to find this information out.
Richard Wilson, CEO of interactive investor, and Moira O’Neill, Head of Personal Finance, have written both to the Financial Conduct Authority and the Financial Services Consumer Panel.
Richard Wilson, CEO, interactive investor, says: “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 - 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.”
Moira O’Neill, Head of Personal Finance, interactive investor, says: “Who wouldn’t want to know whether their fund manager eats their own cooking? The answer is not many, and our research backs this up loud and clear. It is generally only journalists or investment analysts who are in the privileged position to ask these difficult but important questions.
“Investment trusts have a clear edge over funds in this respect, although it is the non-executive directors who are on the radar here. It’s time to turn the heat on fund managers too.”
Eating their own cooking?
In the UK, investors interested in this issue tend to be reliant on whether fund managers choose to be open about it. Annual General Meetings are a rarity for open-ended funds, such as OEICs, and there is no transparency, reporting obligations or frameworks on this issue for private investors.
Open-ended funds compare unfavourably to listed closed-ended investment companies (often referred to as ‘investment trusts’). This is because investment companies have non-executive boards of directors, who have to disclose their shareholdings in annual reports and accounts, and the market rules also require that director dealings are 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), anyone with a substantial holding does have to report this to the market, and for UK listed investment companies, the threshold starts at 3%. So, this would also apply to fund managers of investment companies with very large stakes.
Alan Brierley, Director of Investment Companies Research, Investec, says: “We strongly believe that personal share ownership sends a clear and powerful message to both existing and potential investors. Since our first Skin in the Game report in 2010, it has become the accepted norm for boards and managers to have a meaningful personal investment in companies that they represent. However, 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.”
In the US, the SEC has required 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 the UK should be looking to do the same.
The SEC requires fund managers to disclose their financial interest by band – rather than the precise amount. The bands are: none, $1–$10,000, $10,001–$50,000, $50,001–$100,000, $100,001–$500,000, $500,001–$1 million, and over $1 million. In its letter, ii calls this “sensible and proportionate”.
Interactive Investor Survey
Not everyone will agree that fund managers should invest in their own funds, although among our own sample, 85% thought it aligned fund manager interest with their own, while only 11% thought it could create a conflict of interest and encourage fund managers to take either too little or too much risk.
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