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Questor: investors have a right to know if their fund manager has ‘skin in the game’
Questor investment trust bargain: investment trust managers should be required to disclose their personal stakes, just as board members are
One of the most pertinent questions to ask of any fund manager is whether they personally invest in the portfolio that they run.
Nothing underlines a manager’s conviction in their investment approach as much as putting their money where their mouth is by investing their own cash. So it’s disappointing that an answer to that most basic of questions is not more readily available.
That we know as much as we do about the stakes held by investment trust managers in their own funds, including those tipped by this column, is largely down to the work of analysts at Investec, the bank.
For the past 10 years they have produced regular reports examining the value of shares held by boards and managers in the trusts they run. The most recent edition, published last week, provided another reminder of those trusts that score highly on this “skin in the game” measure.
RIT Capital Partners, the £3.9bn trust tipped here in March, boasts by a substantial margin the largest stake held by a board member. Hannah Rothschild and her family hold an £834m stake in the trust founded by her father, Lord Rothschild.
Such a sizeable stake adds significantly to RIT Capital’s appeal to investors. Investing alongside the Rothschild banking dynasty provides reassurance that the trust will be managed with as much of a focus on preserving wealth as growing it.
Hannah Rothschild’s membership of the trust’s board means that stake must be disclosed under stock market rules. But the same rules do not exist for the managers of investment trusts.
Their holdings need be disclosed only if the manager also sits on the board of the trust, a practice that can present conflict-of-interest complications, or their stake is so large that standard reporting requirements demand it.
This means that managers’ skin in the game, arguably of more importance to investors than the stakes held by board members, is in most cases disclosed only at the whim of the fund group involved.
The two trusts with the largest stakes held by their managers, Pershing Square Holdings and Tetragon Financial, are exceptions. Respective management stakes of £1.3bn and £243m are well above the threshold at which holdings need to be reported to the stock market.
The contrasting fortunes of those trusts also show that managers’ ownership of stakes in their own funds, though an important consideration for investors, is no guarantee of superior returns.
Pershing Square manager Bill Ackman’s high-conviction approach, matched by his heavy investment in the trust, has delivered a 134pc return over the past three years – to the embarrassment of this column, which advised investors to sell in 2018.
Tetragon, by contrast, has struggled since Questor recommended the shares in 2017: it has fallen by 23pc since then. That managers Reade Griffith and Paddy Dear have shared in those losses is cold comfort.
Stakes held by other trust managers, such as the £200m of shares in Scottish Mortgage owned by James Anderson and Tom Slater, have been disclosed only as a result of Investec’s questioning.
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Alan Brierley, an investment trust analyst at the bank, said around a third of investment trusts had provided details of their managers’ skin in the game. But that leaves the bulk that have not.
“We strongly believe that personal share ownership sends a clear and powerful message to both existing and potential investors,” he said. “While board directors are required to disclose ownership and transactions it is disappointing that some managers remain reluctant to do so. We would welcome greater transparency.”
Interactive Investor, the fund shop, has called on the City regulator to introduce rules to require fund managers to declare their personal stakes in the portfolios they run.
Questor agrees. That a manager is personally invested in their fund is not reason enough on its own to invest, and too large a stake can be problematic. But investors at least deserve to know if they are or not, and use that information in their hunt for investment trust bargains.
Questor says: hold
Ticker: RCP
Share price at close: £24.65
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