ComplianceInvestor Psychology

No, fund managers do not have 'skin in the game' – SMSFs do

12 May 2022 1 month(s) ago

There is too much marketing hype from professional fund managers.

The difference between an SMSF and a super fund managed by someone else is that with the former the owner is also the manager. As FirstLinks points out, the managers of other people’s money like to market themselves as having ‘skin in the game’. That, frankly, is just spin.

Fund managers manage other people’s money; the hint is in their title. It does not mean they do a better or worse job because of it, but they are inevitably involved in what the management thinker Peter Drucker nicely described as “pension fund socialism”. They should acknowledge this.

FirstLinks outlines the issue:

“With some share prices down 80% and funds off 30% from their peak, there are plenty of investment professionals looking for ways to explain performance. All fund managers have their marketing patter, much of it similar to others. They describe their unique process of whittling down the investable universe by applying magic potions, they show their genius when selecting stock winners in their portfolio (what, no losers?) and then present the performance numbers of the best fund in their stable.

Then comes the part that every manager, for some misguided reason, considers mandatory. "We have skin in the game" and "We are coinvested with you". In some cases, the earnest vow is even stronger, with statements such as these taken from pitch documents in the last week: 

"It is never pleasant to experience market falls or underperformance. We and the rest of the investment staff have 100% of our investable wealth in our funds. To fellow investors we say: we feel your pain."

"I am frankly dumbfounded by the events of the past 6 months; it feels like the rules of investing I have applied successfully for the past twenty years have been thrown out the window. Nonetheless, with my entire investable asset base in the fund and a substantial portion of the asset base of most friends and family also invested alongside us, I will continue to work hard to turn around the poor performance of the past half year." (my bolding)

Is that what we want from our fund managers? I prefer them to lead a balanced life with good relationships with family and friends, and to wake up refreshed and ready for another day of calm and rational analysis. Not sweating because their net worth is buried in their fund, mum and dad have mortgaged their family home and friends avoid the elephant in the room.

How does this complete lack of diversification accord with Investing 101? What if they are a bond manager, shouldn't they hold some equities? Every financial planner advises clients to run a diversified portfolio based on their future goals, yet here are the genius fund managers telling everyone that 100% of their investable assets sit in one fund. Why is that smart or desirable?”

The fact that fund managers feel the need to say this sort of thing is a tacit acknowledgement that they do not have ‘skin in the game’. Sure, they are accountable in other ways:

“Every fund manager has a professional and personal interest in their fund doing well. It determines their remuneration, their career progress and maybe the value of their business. They don't need to bet their house. The argument that 'alignment of interest' needs the fund manager to invest all their money in the fund is overdone.”

But in many ways this is not real capitalism, with owners' livelihoods on the line. As FirstLinks suggests, that should lead to more scrutiny of the management fees, which are of course in many cases excessive. Especially when there is so much data showing that no fund managers outperform the market over time:

“Which takes us to performance fees. Are they part of this alignment of interest argument or just another way to charge a fee? Love them or hate them, there is no market standard but they should be designed to be fair to investors. Check these features and decide if the fee on your fund is fair, and surprisingly, there may be a fee holiday coming up.”


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