In this final instalment in the series, Leigh Köhler, Head of Research at Glacier by Sanlam, will be unpacking the role co-investment and ownership plays in fund management.
Co-investment: betting on your own horse
Fund managers manage money on behalf of their clients. However, some invest in the funds they manage while others don’t. Investing alongside clients is termed ‘co-investing’ and higher levels of co-investment are often associated with higher levels of alignment of interest between fund manager and client – and vice versa. Glacier Research views a higher level of co-investment as a favourable fund manager characteristic.
Our study shows that 85% of fund managers co-invest in the funds they manage, but 62% invest less than half of their discretionary wealth in their funds. So while the number of managers that co-invest suggests client interest alignment, the level of co-investment may suggest otherwise. A total of 26% of fund managers invest more than half of their discretionary wealth in the funds they manage, 3% invest all their discretionary wealth in the funds they manage, and 10% of the sample do not disclose the level of co-investment.
These results reveal that fund managers who haven’t disclosed their levels of co-investment have performed the best over five years. However, if one isolates the observation only to those managers who do co-invest, the managers who co-invest all their discretionary savings into the funds they manage show the best performance, at the lowest levels of risk. Very interestingly, managers who don’t co-invest have produced good returns at relatively low levels of risk.
Company share ownership
Fund managers are integral employees of investment companies and are often incentivised with company share ownership. However, not all fund managers have shares in the fund management company. Company ownership is often associated with higher levels of alignment of interest between fund manager and asset management company.
Our findings suggested that fund manager alignment with the asset management company is high, with 81% of managers owning shares in the company.
These results indicate that fund managers who own shares in the asset management company have produced superior returns than those who don’t. Interestingly, these managers also seem more willing to take on risk than managers who don’t own shares. Share ownership is an important consideration for Glacier Research, and the analysis seems to confirm the importance of this fund manager characteristic.
One fund manager can be compared with another in many ways. Traditionally, quantitative factors such as performance and risk are used to create comparison benchmarks. These are useful tools but limited in what they reveal. At Glacier Research, we believe a much broader and detailed view of fund managers is necessary to make the picks that underpin clients’ investment prosperity. The age, tenure, undergraduate institutions attended, CFA, CA, and/or MBA qualifications, investment style or company association, team size, team diversity, decision-making, co-investment and share ownership are crucial factors that assist us in benchmarking fund managers.
Conducting asset manager research goes far beyond just looking at the performance numbers. It is said that past performance isn’t a predictor of future performance. If this is true, what else can be considered to select and blend funds that will consistently outperform in the future? We believe the answers lie in the qualitative detail, which is why Glacier Research spends countless hours assessing fund managers. We aim to extract unique qualitative insights that will help South Africa’s financial adviser industry make better investment decisions for their clients.