Over
the years, in my several interactions with portfolio managers most have claimed
to be big investors in funds they run. Perhaps it was politically correct to do
so. Then again, there was no way to independently verify their claims. However,
with market regulator SEBI mandating that investments made by managers and
the fund company's top brass be disclosed, the scenario has changed.
The
disclosures have been startling to say the least. Several
long-tenured managers running large diversified funds have nominal investments
to show for, while others have chosen not invest in their funds. It can be
safely stated that the principle of having ‘skin in the game’
hasn’t been embraced by many managers.
Recently, a
manager who has no investments in his funds came up with a novel justification.
He stated that a ‘manager investing in his own fund doesn’t guarantee
performance’; hence, his investments (or lack of them) are immaterial. To
clarify, he isn’t the only manager to have taken that stand. In my
opinion, this line of thought is both naive and flawed.
Given
their market-linked nature, mutual fund investing entails taking on risk. While
the degree of risk may vary depending on the kind of fund chosen, risk is
pervasive nonetheless.
So
how do investors mitigate risk? By performing an evaluation. For instance, some
may focus on quantitative parameters such as past performance,
risk-return showing, while others emphasize on qualitative factors—manager
skill, investment process et al. It isn’t uncommon for investors to combine the
two either.
The
portfolio manager’s investments in funds he runs is yet another evaluation
tool. A manager investing substantial monies in his funds
demonstrates conviction in his investment approach and acumen. It’s
a classic example of putting one’s money where the mouth is.
None
of the evaluation parameters can guarantee performance.
But that in no way diminishes their relevance. Of all people, a portfolio
manager should be aware that there are no guarantees in his domain. Investing
in markets akin to a business of risk, not a business of
guarantees. Does the fact that there is no guarantee of returns, prevent
the manager from exhorting investors to invest in funds he runs?
I
have no doubt that some managers will continue to steer clear of investing in
funds they run. But they would do well not to trivialise the importance of
having ‘skin in the game’ using inane arguments. As for investors, I am
certain that like me, most will be wary of the chef who doesn’t eat his own
cooking.
