Incentive to fund management – why skin in the game matters

Have you ever washed a rental car? Chances are you haven’t. After all, you’re more likely to take better care of something that belongs to you rather than something that you take care of for someone else.

The same may be true of fund managers. Are they likely to care more about generating good performance if they invest money in their own funds?

We call it having “the skin in the game”. This can be important for investors because it shows that a fund manager‘s interests are aligned with theirs. Talented managers who have a stake in their fund may have more incentives to perform over many years. They should be more likely to act in the long-term best interests of investors and less likely to take excessive risk with the aim of making short-term gains.

That said, this may not always be a good sign. Investing in your own fund may mean taking too much or too little risk depending on the managers’ objectives, rather than those of other investors.

Our investment research team spends a lot of time understanding how fund managers are incentivized, especially when considering funds for the Wealth Shortlist.

Incentives can be a powerful tool, and we want to see an alignment of interests, where managers are only successful if their clients are successful. There’s more to being well incited than having skin in the game.

Incentives matter

Being well incentivized offers the potential for a good performance, but it is also a way to assess whether a manager is likely to stay and continue to manage the fund. And the more we expect to be able to support a manager, the better. We want to be convinced that they have an incentive to focus on their fund for the foreseeable future.

For example, is the incentive program more performance-oriented or asset-raising (increasing the size of the fund to attract more money through fees)? We favor performance-based incentives, especially over longer periods and measured against an appropriate benchmark.

We also ask if a manager owns a part of the company for which he works or if he is a significant shareholder. Managers with a significant stake in the business mean that they are likely to focus on the long-term success of the business and its funds.

However, the incentive is not just about monetary rewards. There are also “softer” factors that can keep a manager motivated for the right reasons. Does the manager show a clear passion for the job? Do they devote enough time to managing the fund and do they have enough autonomy to manage the fund in a way that suits their style? Do they get along with their colleagues and receive support from their team?

The importance of culture

Corporate culture is also a factor. The right culture can have as much of an impact on keeping a manager in the company as monetary incentives.

A good corporate culture should focus on performance and good results for customers. If employees are properly engaged, they are more likely to stay and do a good job. A bad crop could have the opposite effect.

The philosophy and purpose of a manager can be seen as part of the culture. Do they really care about being sensible stewards of customer money?

A close-knit and stable team is also important. Frequent changes within the team (referred to as ‘high turnover’) can be a sign of poor incentives or culture, which could increase the risk of lower performance or failure. departure of the fund manager.

Overall, a great culture can be a competitive advantage for a fund management team. Measuring it is subjective, but that doesn’t make it any less important than quantifiable factors. After all, a strong culture can foster loyalty among investors, as well as those involved in the fund – the co-managers and analysts, and the operational and risk teams around them.

It is not always easy for investors to discover this kind of detail.

That’s where our investment research team comes in – we have access to fund managers to ask these hard-hitting questions. It’s important to note that while incentive and culture are an important part of our research process, they are considered alongside many other factors. Processes, people and performance are all taken into account when adding an investment to the Wealth Shortlist.

How we choose funds for the Wealth Shortlist

Case studies of fund management companies

A summary of our views on the culture of an investment team or group can be found in each of our fundraising updates. Here are a few examples of fund management teams and groups that we believe are well motivated and have a great corporate culture. Remember that a good culture and incentives do not guarantee outperformance, and all investments fall as they rise in value.

First Sentier investments

First Sentier Investments is home to FSSA and Stewart Investors. They are two distinct groups, but they share a similar culture and philosophy that has been refined over the years. Both have teams with pedigree in Asian and emerging markets.

The group philosophy is based on stewardship. When they make an investment, they see themselves as co-owners of the business. They engage with businesses to make sure they are run in a way that will benefit all shareholders.

Sustainability is a key part of the process. Fund managers analyze environmental, social and governance (ESG) factors and focus on companies that they believe could benefit and contribute to the sustainable development of the countries in which they are based.

The teams are also focused on recruiting and retaining great people. Senior team members pass on their knowledge and experience to more junior team members, ensuring that the philosophy and culture will not be diluted over time.

We believe that managers also have a good incentive to perform. For example, Martin Lau, manager of FSSA Asia Focus and Greater China Growth funds, is a managing partner of FSSA, so we believe he has an incentive to ensure the success of the company, including its funds and staff.

FSSA Asia Focus, FSSA Greater China Growth, FSSA Japan Focus and Stewart Investors Indian Subcontinent Sustainabliity are currently listed on the Wealth Shortlist.

Focus FSSA Asia Key investor information

FSSA Greater China Growth Key Investor Information

FSSA Japan Focus Key investor information

Stewart Investors Indian Subcontinent Sustainability Key Investor Information

Troy Asset Management

We appreciate the fact that Troy’s fund managers are dedicated to the same investment philosophy that was established two decades ago. The group has always been clear on how its range of funds is managed and managers do not get lost in overly complicated areas of the investment markets. Preserving wealth when the markets are going through tough times is key, and every manager adheres to this mantra.

Sebastian Lyon, manager of the Troy Trojan fund, is co-owner of Troy Asset Management. We believe he has an incentive to perform and that his funds and his business are doing well over the long term. Other senior members of the group also own part of the company, and we believe this contributes to the stability and loyalty of the team. Fund managers also invest in their own funds.

While Troy is home to a small, tight-knit team of investors, the group has recruited more junior members over the years to increase resources and ensure funds are left in good hands as senior members grow. retire. Despite the team’s growth, we believe Troy has remained a collegial unit with all members capable of contributing.

The Troy Trojan, Troy Trojan Income, Troy Trojan Ethical Income and Troy Global Income funds are currently listed on the Wealth Shortlist.

Troy Trojan Income, Troy Trojan Ethical Income and Troy Global Income hold shares in Hargreaves Lansdown Plc.

Troy Trojan Key Investor Information

Troy Trojan Income Key Investor Information

Troy Trojan Ethical Income Key Investor Information

Troy Trojan Global Income Key Investor Information

See all the funds selected by our analysts

The Wealth Shortlist is designed to help investors build their own well-balanced and diversified portfolios. We take a close look at funds to make sure the list only contains funds that our in-depth analysis shows have the greatest potential for performance.

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