Fund management incentivisation and culture – why skin in the game matters

Have you ever washed a rental car? The chances are you haven't. After all, you’re more likely to take better care of something that belongs to you, rather than something you're looking after for someone else.

The same might be true for fund managers. Are they likely to care more about generating good performance if they invest money in their own funds?

We call this having ‘skin in the game’. It can be important for investors as it shows a fund manager’s interests are aligned with their own. Talented managers who have a stake in their fund may be more incentivised to perform over many years. They should be more likely to act in the long-term interests of investors and less likely to take excessive risks aiming for short-term gain.

That said, it might not always be a good sign. Investing in their own fund could mean taking on too much, or not enough, risk depending on the managers’ objectives, rather than other investors’.

Our Investment Research team spends a lot of time understanding how fund managers are incentivised, especially when considering funds for the Wealth Shortlist.

Incentives can be a powerful tool, and we want to see an alignment of interests, where managers only do well if their clients do well. There is more to being well-incentivised than having skin in the game.

Incentivisation matters

Being well-incentivised offers the potential for good performance, but it’s also a way to assess whether a manager is likely to stick around and stay managing the fund. And the longer we expect to be able to back a manager, the better. We want to have conviction they’re incentivised in a way that will see them focused on their fund for the foreseeable future.

For example, is the incentivisation package focused more on performance or asset gathering (growing the size of the fund to attract more money from fees)? We favour incentivisation focused on performance, particularly longer timeframes and measured against an appropriate benchmark.

We also ask whether a manager owns part of the business they work for or are a major shareholder. Managers with a meaningful equity interest in the business means they’re likely to be focused on the long-term success of both the business and its funds.

Incentivisation isn’t just about monetary rewards though. There are ‘softer’ factors too which can keep a manager motivated for the right reasons. Does the manager demonstrate a clear passion for the job? Do they spend enough time on fund management and have enough autonomy to run the fund in a way that suits their style? Do they get on with their colleagues and receive support from their team?

The importance of culture

Company culture comes into this too. The right culture can have as much impact on whether a manager stays at the business as monetary incentives do.

Good company culture should emphasise performance and good outcomes for clients. If employees are properly engaged, they’re more likely to stick around and do a good job. A poor culture could have the opposite effect.

A manager’s philosophy and purpose can be considered as part of the culture. Do they genuinely care about being sensible stewards of clients’ money?

A close-knit and stable team is also important. Frequent changes to the team (known as ‘high turnover’) might be a sign of poor incentivisation or culture, which could increase the risk of weaker performance or a fund manager departure.

Overall, an excellent culture can be a competitive advantage to a fund management team. Measuring it is subjective, but that doesn’t make it less important than quantifiable factors. After all, a strong culture can encourage loyalty from investors, as well as to those involved in the fund – co-managers and analysts, as well as the operational and risk teams around them.

It’s not always easy for investors to find out this kind of detail.

This is where our Investment Research team comes in – we have access to fund managers to ask those hard-hitting questions. Importantly, while incentivisation and culture are an important part of our research process, they are considered alongside lots of other factors. Process, people and performance are all considered when adding an investment to the Wealth Shortlist.

How we choose funds for the Wealth Shortlist

Fund management company case studies

A summary of our views on an investment team or group’s culture can be found within each of our fund research updates. Here are some examples of fund management teams and groups we believe are well incentivised with excellent company culture. Remember good culture and incentivisation doesn’t guarantee outperformance, and all investments fall as well as rise in value.

First Sentier Investments

First Sentier Investments is home to FSSA and Stewart Investors. These are two separate groups, but they share a similar culture and philosophy that has been honed over many years. Both have teams with a pedigree in Asian and emerging markets.

The groups’ philosophy is founded on stewardship. When they make an investment, they see themselves as part-owners of the business. They engage with companies to make sure they're run in a way that'll benefit all shareholders.

Sustainability is a key part of the process. The fund managers analyse environmental, social and governance (ESG) factors and focus on companies they believe could benefit from and contribute to the sustainable development of the countries they're based in.

The teams also place emphasis on recruiting and maintaining great people. Senior members of the team pass on their knowledge and experience to more junior members of the team, ensuring the philosophy and culture doesn’t get diluted over time.

We think the managers are also well-incentivised to perform. For example, Martin Lau, manager of the FSSA Asia Focus and Greater China Growth funds, is a Managing Partner of FSSA, so we think he's incentivised to ensure the business, including its funds and people, are successful.

The FSSA Asia Focus, FSSA Greater China Growth, FSSA Japan Focus and Stewart Investors Indian Subcontinent Sustainabliity funds are currently on the Wealth Shortlist.

FSSA Asia focus Key Investor Information

FSSA Greater China Growth Key Investor Information

FSSA Japan Focus Key Investor Information

Stewart Investors Indian Subcontinent Sustainability Key Investor Information

Troy Asset Management

We like that Troy's fund managers are dedicated to the same investment philosophy that was established two decades ago. The group has always been clear about the way its range of funds are managed, and the managers don't stray into overly complicated areas of investment markets. Wealth preservation when markets hit a rough patch is key, and each manager adheres to this mantra.

Sebastian Lyon, manager of the Troy Trojan fund, is a part-owner of Troy Asset Management. We believe he's incentivised to perform, and for his funds and the business to do well over the long term. Other senior members of the group also own a part of the business, and we think this contributes to the stability and loyalty of the team. Fund managers also invest in their own funds.

While Troy is home to a small, close-knit team of investors, the group has recruited more junior members over the years to boost resource and ensure the funds are left in good hands as and when more senior members retire. Despite the team’s growth we think Troy has remained a collegiate unit with all members able to have input.

The Troy Trojan, Troy Trojan Income, Troy Trojan Ethical Income and Troy Global Income funds are currently on the Wealth Shortlist.

Troy Trojan Income, Troy Trojan Ethical Income and Troy Global Income hold shares in Hargreaves Lansdown Plc.

Troy Trojan Key Investor Information

Troy Trojan Income Key Investor Information

Troy Trojan Ethical Income Key Investor Information

Troy Trojan Global Income Key Investor Information