Should you care if your manager has skin in the game?

When you hear fund managers talking about ‘skin in the game’, it’s usually referring to the manager investing their own money in the same fund that they’re running.

It's a fairly common phenomenon. Richard Staveley of Rockwood Strategic trust and Stephen Yiu of the Blue Whale Growth fund both make it well known that they eat their own cooking. In Yiu’s case, the Blue Whale fund is the only fund he invests in at all, with a simple argument: why would he back his competitors over himself?

There are plenty of others who also practice what they preach, and there are usually two strains of thought to it.

One, they argue it’s proof they truly back their investment thesis since they’re willing to put their own money behind it. Second, it gives the manager a better insight into what their investors are going through because they’re on the journey with them.

It’s a catchy concept, but how much weight should you give a manager investing in their own fund, or not, if you’re thinking about putting your money in with them?

We turned to our in-house experts to get their take: Paul Angell is head of investment research at AJ Bell. Part of his job is selecting who goes on the Favourite Funds list, in which a managers’ calibre is heavily considered.

Angell says that while it can be reassuring for investors to know that their fund manager is on the journey with them and that they clearly back what they’re doing, skin in the game isn’t a total prerequisite if you’re thinking about investing in their fund.

If a manager is running an investment trust, you can find out if they’re invested or not without them saying it explicitly. Because these are listed companies, the managers and the board have to disclose how many shares they own. This isn’t possible on an open-ended fund due to the different structure, so if you’re curious, you’ll have to hope the manager unveils that information voluntarily.

Sometimes it’s not appropriate for them

Another reason why it’s not an immediate red flag if a manager isn’t invested in their own fund is that they are also investors, and as Angell explains, depending on their personal profiles and goals, the fund they run might be the entirely wrong asset class for them.

For example, if you have a young fund manager overseeing a corporate bond fund, he may be suited to having a bigger equity focus in his personal portfolio. It just happens that his expertise is in another sector. The inverse of that is a manager of a concentrated tech stock fund who’s coming to the end of their career and preparing for retirement. He would likely be focused more on income and defensive paying options than the high growth style of his own fund.

“A manager will typically want to benefit from diversification as much as any other investor, rather than be wedded to a particular asset class or investment style they happen to be good at managing,” Angell says.

Cameron Falconer, head of multi-asset manager research at Aviva Investors, made the point that investing can be an emotional experience. If a manager is backing their own fund and they have an excessive weighting towards it, it could potentially distort their decision-making process. Falconer also warned that it could feed into behavioural biases, such as loss aversion and confirmation bias, which could damage the overall returns.

Like most things, there are pros and cons, but a manager not eating their own cooking isn’t necessarily a red flag, and equally, if they are along for the ride with you, it’s worth paying attention to.