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Improving on transparency
When portfolio managers invest in listed companies, they have full transparency of the director share dealings in these companies. If, for example, the chief executive of one of their investee companies sold all their shares in the company, this could be an incredibly valuable signal to them.
Should we not then, as researchers of funds, learn from this and ask for the same transparency from portfolio managers when it comes to buying and selling shares in the funds they manage?
Firstly, we must acknowledge a difference between director dealings and portfolio manager dealings in their own fund. Directors often have inside information and so they need tighter rules around when they can buy and sell shares in the company employing them. There are closed periods when they cannot buy or sell shares, for example.
Also, we concede that the buying and selling of funds by the portfolio manager is not always an indication of conviction in the fund. Managers, like company directors, may sell their investment to pay off a personal liability, for example.
But, as with director’s dealings, we do not think that any false signals coming out of such information diminishes the need for full disclosure. To explain why we feel transparency is important, we have created a few hypothetical scenarios to test how you might feel as a client invested in these fictional funds.
Manager A runs two large funds, a global equity and a UK equity fund and you are invested in the UK strategy. She has 100 per cent of her ownership in the global fund only. Manager B runs a large bond fund and last year he sold out completely from the fund, following impressive performance. Manager C runs three strategies and he sold out of all of them recently, following the announcement of a merger with another investment firm. Manager D, a long-standing manager, recently handed over the management of her fund to her experienced co-manager, but sold out of the fund a month later. Manager E has under-performed for 18 months and recently allocated a meaningful amount to his fund. Would you want to meet these managers and ask them about these decisions?
We certainly would. But for now, most of this information is not readily disclosed.
We think that it would be better for their clients if portfolio managers disclosed the investments they make in their own funds, including purchases and sales. It is because they are, like directors of companies, fiduciaries and full transparency is a very important principle for those in a stewardship role.
The information is also incredibly useful. Such disclosure will help reveal the extent to which the managers are willing to eat their own cooking, the real test of alignment with a client. It could also show us how their belief in the fund changes over time.
And, importantly, it would enable us to establish if there was anything statistically predictive, like whether managers adding to their investment in the fund was a good prospective signal. It is hard to see why this form of transparency would not benefit end clients and we are pushing for it to happen.