Managers: put your money where your mouth is

Advisers have been asked to consider the benefits of supporting fund managers who put their money where their mouth is.

Tim Samway, institutional investment manager at boutique firm Hyperion Asset Management, has questioned the alignment of manager and investor interests in circumstances where institutional fund managers can’t, or don’t, manage clients’ money in the same way as they manage their own.

Samway said he was seeing “an increasing level of [adviser] annoyance with managers who are offering clients a benchmark aware portfolio holding 70 stocks when the managers are investing in a concentrated benchmark unaware portfolio of 15 or 20 stocks on their own account”.

He argued that “some fund managers — typically the larger ones — are simply not in a position to practice what they preach”.

Instead, “their structure and investment aims may in fact be constrained by sheer weight (or pursuit) of funds under management, resulting in a more ‘beige’ approach to investment”. This in turn creates an industry comfortable with taking a relative view of risk and accepting losses as a consequence of following the benchmark as “an inevitable part of the game”.

“Increasing the degree of a fund manager’s personal interest in investment outcomes — including fear of capital loss — can … rather starkly bring home the difference between relative and absolute approaches to risk,” Samway said.

A real alignment of investor and manager interest, Samway said, places a “layer of rigour around investing in the poorer stocks”.

He encouraged advisers to ask fund managers “more probing questions about where and how they invest their own money”, adding managers should be prepared to answers critical questions around manager and investor alignment.