Many fund managers invest in their own funds but does it improve performance? After analysing track records, investment boutique Charlotte Square is launching a fund of managers who put their money where their mouth is.
Charlotte Square found a huge discrepancy between the performance of funds with monetary backing from their managers and those without. William Forsyth, who will run the new product, says the 10 funds that comprise his portfolio would have returned 118 per cent over the past five years against a fall of 18 per cent in the FTSE All Share index.
The 10 managers in the portfolio include well respected stockpickers such as Fidelity's Anthony Bolton, Artemis's John Dodd and Crispin Odey, founder of Odey Asset Management. Would their performance really hinge on whether their own money is at stake?
Bates Investment Services head of investment strategy James Dalby says: “We would never make managers investing their own money a key criteria. It is interesting for IFAs to cite and it shows a high degree of conviction on the manager's part but we would not pay too much attention to it.”
According to Credit Suisse Asset Management's fund of funds team, the manager's financial position is not a very important issue. Co-head of multi-manager Robert Burdett says: “There is more to it than that. We look at how fund managers are remunerated but it is a question of scale and other factors – how many other funds is the manager running and so on. It is the environment around the manager we look at. You cannot take any one factor in isolation.”
The team uses a decision matrix comprising 16 factors to determine whether to invest in a fund and Burdett says the issue of vested interests barely rates a mention.
However, he admits that many of the funds in CSAM's constellation Fof – which invests largely in boutique-based managers – have substantial amounts of their manager's personal money invested.
Many boutiques have prospered as fund managers from the bigger groups have become disillusioned and decided to join a smaller house where they can take an equity stake. This often prompts them to invest in their own funds.
Artemis, for example, insists that its managers invest in their own funds if there is an equivalent in a rival house. It says the rule engenders a productive atmosphere. Product development and communications director Nick Wells says: “It is beneficial. If you were confident about your fund, you would want to be part of it. The majority of the staff here, even the junior people, invest in our funds as well. It gives you the feeling of pulling together.”
Alan Steel Asset Management consultant Alan Adam says: “We do not recommend anything that we would not invest in ourselves so, if a manager is not going to invest in his or her fund, why should we? I think it just makes the managers that bit sharper.”
In interviews with fund managers, Adam always asks if they have money invested in their fund. If the answer is no, he says he would reassess the fund's position on his buy list.
Although not all IFAs take this stand, many prefer managers to demonstrate their commitment. A&B director Tony Lanning says: “We do like managers to have some of their remuneration as units in their own fund. If you can align the interests of the client and the manager, then you have a win-double. What could be better?” But some fund of funds specialists point out that getting such information can be difficult. Jupiter head of multi-manager John Chatfeild-Roberts says: “We always ask fund managers about their own stakes but it is an easily avoided question. A manager could have some money in the fund but if they have Â£50m in the bank it does not really matter to them. We cannot get that sort of information.”
Chatfeild-Roberts says he would find it hard to run a fund with the restrictions that Charlotte Square has imposed and suspects there may be an element of canny marketing behind its launch.
But one fund manager, who invests in his own fund, says it is no myth that managers are affected by having their own money at stake. He says: “It should not make a difference but it does. You are more conscious that when the market goes down, it is your money too, so you tend to take a more defensive approach than perhaps you would otherwise. Maybe you are more attuned to market movements.”