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Is it really important how much money a manager invests in his fund?

Do all UK fund managers need to invest their money in their funds? And should they tell us how much money they have invested in? There are good reasons they think they should.

Think about how fund managers are making money. Fees are calculated in “ad valorem”, as a percentage of the value of assets under management, and are taken directly from the assets under management each year. In short, the main concern of fund managers is not so good performance, but the expansion of assets under management. The more you manage, the higher the absolute value of the percentage you get.

They can do this in two ways: to work well and to use a combination of marketing and anxiety-inducing public relations-you don’t have enough savings to retire. Hmm! – To persuade you to invest more.

Given this, we can see why it makes sense for managers to hold units in their funds: they put new money into the fund (it’s entirely in their interests) and the fund Make sure you focus on both making things work (which also benefits us).

Fortunately, this week the Interactive Investor platform conducted a brief survey of the funds invested by fund managers in the rated Fund Manager’s Super60 and Ace40 lists.

Nothing is as simple as it seems at first

The data is appealing to what it tells us – 94% of the responding managers say they have invested in the funds they manage, and 24% say they have invested more than £ 1 million. rice field. That is wonderful. Given that at least 77% of users say, “If a manager personally invests in a fund or investment trust, he or she is more likely to invest in a fund or investment trust,” the answer that Interactive Investors wanted. is.

But it’s also interesting that it doesn’t tell us. Approximately 60% of polls prefer not to say how much managers have in the fund, most often in the range of £ 500,000 to £ 1 million. This may be fine. There is also a perfectly good reason to exclude the amount from the discussion. Managers can claim that they are already very exposed to their funds (their career, and therefore long-term income depends on their performance), so they hold too much cash on it. It’s not crazy wise to do.

Managers may want to hedge their exposure by holding a fund that does what they do not. After all, the market can be unfriendly. This is especially true if the manager is in a niche position. For example, is it wise to rely on small frontier market funds for both careers and pensions? If so, it motivates you to try to minimize the risk of the fund when your investor (who owns a small portion of the portfolio) wants you to maximize it. maybe.

There is also a withdrawal issue. If you know that a manager has $ 1 million in funding, that’s part of the reason you hold it. They will have to tell you about divorce, tuition, or expenses. Of their mother’s nursing home if they have to take out their money. That seems unfair.

Finally, knowing how much a manager has invested is not very useful if you don’t know much about their net worth. Fundsmith’s Terry Smith is open to holding £ 250m, or “a significant portion of my wealth,” in the funds he manages. I can believe – Smith is rich, but £ 250m is a significant percentage of most people’s wealth.

But what if you know that your manager has £ 50,000 in funding? If they’ve been in business for 30 years and run a reasonably sized fund that has vaguely caught up with the market, that’s a big change. But for a 35-year-old with three children and a mortgage, that’s a huge expansion and could be a big vote of trust. Again, a bit of oversharing is needed to make the information relevant. None of this is simple.

Can managers make large investments?

That said, I think there is one main reason why most fundhouses don’t want their fund managers to know their investment. That’s not because fund managers invest too little, but because they often invest too much. It can cause nasty questions.

The point is that it’s a seemingly highly competitive business, with very high profit margins, and you can pay a lot of money to your manager and make that much money with just one fund (one for everyone). I don’t just have it). Fund)?

The answer is the price, as it has been for decades. These are going down little by little. Recently, few managers have the nerve to launch a fund with a fee of 1% or more, and large homes emphasize regular cuts.

This month, Baillie Gifford reduced its annual membership fee for the BG UK Alpha Fund from 0.55% to 0.47%, “the 15th time Baillie Gifford has reduced fees for one or more funds and mutual funds since 2013.” Said that.

that’s nice. However, Baillie Gifford manages nearly $ 500 billion. We charge the lot 0.47% (not-this is just an example) and the commission income is $ 2.35 billion. Historically, labor costs accounted for about 56% of fund management costs, and the average rate of return for fund management companies is about 35%. There is real money around here. This leads to real wealth for fund managers.

On the plus side, there is more data on fees than the amount the manager invested in the fund. It’s also not that complicated. In 2016, Morningstar Russell Kinel’s research revealed that cost was one of the “proven predictors of future fund performance.”

It turns out that the cheapest funds are “at least 2-3 times more likely to succeed than the most expensive funds.” “Over virtually all asset classes and time periods,” Kinnel said, “clearly demonstrates that costs need to be kept in mind, regardless of the type of fund the investor is considering.” ..

lesson? Sometimes it’s useful to know, but it’s complicated to interpret (how much money your money manager has invested). Others are important and easy to interpret (the impact of still too high prices). When choosing a fund, you may focus on the latter.

• This article was first published in the Financial Times



Is it really important how much money a manager invests in his fund?

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