Pershing Square, Tetragon Financial Group and Apax Global Alpha are among the investment trusts where managers have the most ‘skin in the game’, according to a report by Investec Corporate & Investment Banking.
Analysts Alan Brierley and Ben Newell said that while there is implied skin in the game “given the career risk associated with poor performance”, there are a number of managers with “explicit” investments.
The below chart shows the trusts where the cash of the manager and wider team is worth more than £100m of assets (as at 22 October 2019).
Source: Investec Corporate & Investment Banking
The trust with the biggest investment by management is Pershing Square Holdings, the listed hedge fund overseen by activist investor Bill Ackman. Its team has £668m invested in the strategy.
Tetragon Financial Group’s management team has £257m in its strategy, while the members of Apax Global Alpha’s team have backed their conviction with £194m of their own money.
In total there are 74 managers and management teams with investments in excess of £1m.
“While this level of conviction is impressive, we take equal comfort from individual portfolio managers who have a significant portion of their wealth invested,” said Brierley and Newell.
“For example, we recently met with Simon Barnard, manager of Smithson Investment Trust, who advised that 90 per cent of his investible wealth is in this fund with the balance invested in Fundsmith Equity.”
However, while a manager’s investment in their fund can signify an alignment of goals, it is no guarantee of performance.
“Skin in the game is not a panacea for superior returns,” the Investec analysts explained.
For example, listed hedge fund Boussard & Gavaudan and micro-cap & US real estate specialist JZ Capital have management investments of £129m and £100m respectively, but performance has been poor.
“We believe this is a function of significant management stakes which have given the managers too much power and weak corporate governance,” they said. “The performance records certainly don’t justify the high fees paid.”
There are many trusts with significant manager investment that have made strong returns, however. Below, Trustnet highlights some of the five Crown-rated trusts whose managers have skin in the game.
First on our list is the £7.6bn Scottish Mortgage Investment Trust, overseen by James Anderson and Tom Slater. This is a high-conviction, global equity strategy that invests in well-run businesses for the long-term (at least five years). Top holdings include: Amazon.com, Alibaba, Tencent, Tesla, Ferrari and Netflix.
Scottish Mortgage has made a total return of 122.58 per cent over the past five years, compared with 83.8 per cent from its average IA Global peer, as the below chart shows.
Performance of trust vs sector & benchmark over 5yrs
Source: FE Analytics
According to Investec, the management team has around £86m invested in the trust.
Another top-rated Baillie Gifford trust where the managers have invested a large chunk of their own money – £13.6m – is global equity strategy Monks.
The £2bn trust is overseen by Charles Plowden, Malcolm MacColl and Spencer Adair. The three managers aim to build a diversified portfolio of growth stocks, again with a long term (five-year) view.
Monks has made a total return of 139.21 per cent over the past five years.
Another top-rated trust overseen by one of the industry’s best-known names is Finsbury Growth & Income: Alpha Manager Nick Train has £23.7m of his own money in the £1.8bn trust. He invests in a concentrated portfolio of companies with exceptional businesses or franchises and takes a long-term view of holdings. Finsbury Growth & Income is up by 90.09 per cent over the past five years.
Train and business partner Michael Lindsell also have £28.4m invested in the £291m Lindsell Train Investment Trust.
Another highly rated trust overseen by a top-rated manager is Schroder Asian Total Return.
The Asia ex-Japan equity strategy, run by Alpha Managers King Fuei Lee and Robin Parbrook, has returned 113.19 per cent over the past five years, compared with a 59.26 per cent return for its average IT Asia Pacific peer.
Performance of trust vs sector & benchmark over 5yrs
Source: FE Analytics
However, the level of investment from the management team in the £362.8m trust is lower than other funds in Investec’s study, accounting for just £1.3m.
Other five Crown-rated trusts with significant manager backing include Herald Investment Trust, in which manager Katie Potts has invested £5.7m; and, Montanaro UK Smaller Companies, where manager Charles Montanaro and family have invested £12.8m.