Skin in the game
Investment managers who put their own money in their own funds show strong belief in their ability.
There’s a moment in The Merchant of Venice when Shylock requires of Antonio the promise of a “pound of flesh” if various cargoes fail to arrive at port and debts cannot be made good. The well-known Shakespeare scene, among other things, explores the time-honoured precept of putting oneself on the line when involving others in risk.
Nowadays, the notion is graphically encapsulated in the phrase ‘skin in the game’, which has gained currency in recent decades across business and public life. In the world of fund management, this vivid piece of American parlance is now used to describe specifically the act of managers putting their own money behind their own investment ideas.
Like the ocean trade of Shakespeare’s Venetian merchants, the world of investment can seem exotic and removed from the everyday, as well as fraught with unpredictability and danger. Faced with uncertainty, it is understandable that investors will look for reassuring signs that they have chosen the right course towards their long-term goals.
Fund managers who match their investors’ financial commitment with their own have a straightforward, principled appeal. Put simply, skin in the game is as sure a way as any for fund managers to display the veracity of their work and their belief in the long-term potential of their decisions.
Morningstar, in a study from February this year on stewardship practices among fund managers, focused on this idea of trust as a critical element in a meaningful relationship between investment professional and investor. The US research group found that just under half of US mutual fund managers do not have their own money invested in the funds they manage.
Broadly, Morningstar’s study argued that managers with skin in the game and a strong stewardship ethic can “tip results in investors’ favour”. Separately, in a study published in October, Capital Group also concluded that, while self-investing alone can’t promise results, investment firms that have managers who invest in their funds outpace the market more often than those who do not.
Conviction of belief
Full disclosure of personal investments is one of the criteria required by consultants Stamford Associates as part of its research process that supports the work of the St. James’s Place Investment Committee. Moreover, self-investing is seen as an expression of the belief that a fund manager has in their active investment process. Stamford will typically expect to see this hallmark of conviction from the fund managers they recommend.
Dan O’Keefe and David Samra of Artisan Partners have a significant personal investment in their strategy. The US investment managers say that the commitment of investing in one’s own funds ensures that the strategy has their complete attention. “We are ‘putting our money where our mouth is’”, says O’Keefe. And the alignment of interest means that they participate in both the ups and the downs of the markets. “Fundamentally, we win or lose with clients,” says Samra.
Likewise, partners at EdgePoint have the lion’s share of their investable assets committed to their own portfolios. “Imagine you’re at a dinner party and the host hasn’t eaten any food; you’d probably be a little wary of trying it yourself”, observes EdgePoint portfolio manager Tye Bousada. “Managers who invest in their own funds create a community of shared interests and mutual goals with their investors.”
Ancient and modern
Certainly, the notion of skin in the game is time immemorial (3,800 years ago, for example, Babylonian code required builders to accept that they would be put to death if their work fell down). Entrepreneurs have always placed their worldly effects – their pound of flesh – behind new ventures, as have family businesses. And investors often look to see if senior executives have a shareholding in their company, or are remunerated through shares.
It is right to give extra credit to managers who ‘eat their own cooking’, but investors should not necessarily shun those who do not. Self-investing is no substitute for a well-diversified portfolio of assets and risk exposures; it is no more appropriate for a fund manager than it is for an investor to commit all their worldly wealth to a very specialist strategy.
We all want the chance to make informed choices. And we want those who we choose to invest for us to display confidence in their decisions. And one of the best demonstrations of this belief is for a fund manager to place their own wealth – although in the world of modern investment this does not require actual body and flesh – on the line. Self-investing is a good measure for us all to assess the conviction of other’s ways.
The opinions expressed are subject to market or economic changes. This material is not a recommendations, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.
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