Eating your own cooking
It can offer an important signal when fund managers are willing to invest their own money in their strategies.
“With apologies to Gordon Ramsay, the old adage is true: never trust a skinny chef,” says Jim Henderson of Aristotle Capital Management. “Chefs – the good ones anyway – cook with passion, taste along the way and seem to enjoy the fruits of their labour. The end product is a piece of themselves that is there to be enjoyed by others. So, why would you not eat your own cooking?”
Henderson applies a similar logic to investing, arguing that the best fund managers care deeply about their investment decisions, and therefore want to invest in the fruits of their labour.
“Like a chef tasting along the way, passionate fund managers are involved in every aspect of the investment process, from idea generation to eventual inclusion of that idea in a portfolio,” says Henderson.
“In fact, many investment consultants, when searching for high-quality fund managers, include that quality as a highly sought-after attribute. If you are passionate about what you do, why would you not invest in your fund alongside your clients? In fact, you would have to consider what internal flaws in a firm would cause fund managers to [choose] not to invest in their own firm or strategies,” says Henderson.
But recent Morningstar data suggests that around half of the 15,000 mutual funds in the US (‘unit trusts’ in UK terminology) are run by portfolio managers who do not invest in their own funds1. Inevitably, this lack of a personal financial connection to their fund raises questions about the manager’s confidence in their investment process.
In Europe, new rules were introduced in 2016 to ensure that fund managers receive part of their bonuses as a stake in the funds they run, but such a reform is not considered likely in the US – even in Europe, the regulatory tightening still does not oblige managers to actually invest their own money. For those seeking out the best fund managers from around the world, then, the question remains pertinent: does it matter if they don’t eat their own cooking?
Picking the stock-pickers
“We like portfolio managers who have genuinely active investment approaches,” says Nick Wyld of Stamford Associates, which has been a long-term adviser to St. James’s Place on its fund manager selection and monitoring processes.
“This typically manifests itself in high-conviction portfolios that only comprise holdings which the manager considers attractive from a fundamental investment perspective,” says Wyld. “We expect the portfolios to represent the managers’ best ideas – in effect, to be invested as if it were their personal assets.”
Little wonder, then, that Stamford likes its managers to actually stake a meaningful amount of their own money on their investment strategy, by investing alongside their clients.
“To us, the question is not ‘Why should they?’ but ‘Why wouldn’t they?’,” says Wyld. “Investing in their own funds not only demonstrates self-belief but provides an important alignment of financial interests with unitholders.”
“So, in the same way that I, as a St. James’s Place client, am happy to eat my own cooking by investing in a number of funds for which Stamford advises the Investment Committee, so we expect to see portfolio managers willing to show the same commitment and confidence,” says Wyld. “After all, if they don’t have sufficient confidence to back their own judgment, why should anybody else?”
Aristotle Capital Management is a fund manager for St. James’s Place. Stamford Associates is an adviser to St. James’s Place.
The opinions expressed are those of Jim Henderson of Aristotle Capital Management and Nick Wyld of Stamford Associates and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.
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