Should managers invest in the funds they run?
Does the person managing your money invest his or her own cash in their fund too? Having a fund manager whose interests are aligned with your own is, on the face of it, a good thing and it's arguably one of the questions to which you should seek answers before investing in an actively managed fund or investment trust.
This information is easier to find in the investment trust space, because they are quoted on the stockmarket. There is no compulsion, however, for UK fund groups to disclose managers' holdings in the funds they run - but it wouldn't hurt to ask.
In the US, it has been mandatory for fund groups to disclose this information since 2006. That helps to show whether the manager's interests are aligned with the investor's.
Here, in the UK, fund management groups including Cazenove, Liontrust Asset Management, Threadneedle, Jupiter and BlackRock encourage fund managers to invest alongside their clients.
It is arguably something that is more entrenched among smaller, boutique fund groups or partnerships. Indeed, John Ions, chief executive of small funds group Liontrust, says all the group's investment managers have large holdings in the funds they run and only invest in the group's funds.
The principle behind the practice does come with caveats, however. While some groups believe it helps to promote investing discipline, there is also the danger that a fund manager with a significant stake of personal wealth might be inclined to take less investment risk than might be expected.
Imagine that you are a specialist fund manager with a brief to invest across European equities - from small company shares to giants such as Nestlé or Roche - and your employer has encouraged you to invest a significant chunk of your wealth in the fund. The investing decisions you make could vary depending on your age: a 35-year-old is likely to take on more risk than a 55-year-old hoping to retire with a decent nest egg in five years' time.
John Chatfeild-Roberts, chief investment officer at Jupiter Asset Management, also runs the firm's multi-manager funds. He says the selection process used to favour fund managers that invested in their own funds, but Jupiter doesn't pay as much attention to it now. Jupiter discovered that where a fund manager had a significant amount of personal wealth tied up in the fund they run, their risk-taking appetite was often diminished.
That's fine if you are nervous and would prefer to sleep easy. But that can also be achieved by diversifying your exposure across asset classes including shares, bonds, cash and property. And there are multi-asset and "balanced" funds that cater for various tolerances to risk-taking.
However, several investment trusts leap out as explicitly targeting both capital preservation and wealth creation.
Independent Investment Trust, Personal Assets Trust, RIT Capital Partners and Ruffer Investment Company have fallen behind the sector averages over the year as stockmarkets have raced ahead. But the fund managers and directors also have significant stakes in their success.
Investment trust director Lord Rothschild has in excess of £200 million invested in RIT Capital, which has a market capitalisation of £1.9 billion. At Independent, fund manager Max Ward and directors hold around £30 million of the £146 million trust. Frank Rushbrook has more than £4 million in Personal Assets. Jonathan Ruffer, who's stepped back from managing Ruffer, has around £2 million at stake.
A few manager stakes leap out amongst investment trusts whose approach is less constrained by capital preservation concerns. Scottish Mortgage's James Anderson holds shares worth around £8 million; Alex Darwall at Jupiter European Opportunities has more than £10 million of the company; and Anthony Bolton holds nearly £2 million of shares in Fidelity China Special Situations.
The ride with the last-named trio will undoubtedly be more bumpy, but at least you know managers and directors of these trusts are with you come rain or shine.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.
Investment funds that invest in other investment funds from a wide range of asset managers and are often referred to as funds of funds. Some multi-manager funds only invest in the funds of the investment house providing the fund of funds and these are known as “fettered”. An “unfettered” multi-manager fund is free to invest in what the fund manager believes are the top performing funds from across different markets and industries. Investing in multi-manager funds means your risks are spread across geographical regions and industry sectors but it also adds another layer of charges and some multi-managers also levy an out-performance fee.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).