13th June 2025
Not quite annually, the Investment Companies Research Team at Investec, led by Alan Brierley, produces a Skin in the Game report. It serves as an excellent and insightful review of which managers and directors have significant shareholdings in their respective investment companies. It also reports on the much-increased level of diversity in boardrooms across the sector, but our focus in this note is the alignment of interest of related parties and minority shareholders. The report can be found by following this link, but it is only available for MIFID research clients of Investec. Contact your Investec representative if you would like to see it.
We wanted to highlight a few key points arising from the note as we always want to see alignment of interests whenever we make an investment in our Hawksmoor funds, be it an open-ended fund where the manager has their own wealth invested or an investment trust where the managers and directors also own shares. After all, the four fund managers here at Hawksmoor each have substantial personal and family money invested in our own funds.
Brierley has been producing the report since 2010 and it is clear that the extent of personal investment by directors has come a long way since then. It is now standard practice to see board members having a meaningful stake in the company they represent and be focussed on fewer directorships. This is understandable given the increased demands on directors due to greater regulation and more complex asset classes offered via new investment company IPOs since 2010. We just love the quote from one director after the inaugural Skin in the Game report back in 2010 who infamously said, “I’m on so many boards, I couldn’t possibly have an investment in all of them!”. Overboarding is an important subject across all listed companies with many proxy voting services having a hard line on reappointments if a director is on more than a certain number of boards. This report flags a few directors that are on four boards, but most of those are conventional trusts investing in equity markets. Directors that are on the board of more than one alternative asset investment company, even if just a couple, are more of a concern for us.
The Investment Companies sector is no longer an easy route into retirement for financial services professionals. We have been calling for directors to be paid more in order to attract higher quality directors who are experts in the asset class particularly as the sector has evolved to include alternative asset classes, such as renewable infrastructure, that need a greater oversight of the assets. In addition, we think most underestimate the amount of time required by Board directors to carry out their duties effectively. This should be rewarded appropriately. They also need to be able to challenge the investment managers who will have an asymmetry of knowledge compared to shareholders. It was therefore pleasing to see in the report that the average pay of a director on the board of an alternative investment company is much higher than one on a conventional company board.
As the report points out, little or no personal investment is rare. However, an investment company should not be disregarded as a viable investment just because of a lack of skin in the game. If we want a younger demographic and more experts in unconventional asset classes, these people are likely to come from academia or industries where wealth and fortunes are harder to come by. One thing that is impossible for this report to show is the amount of personal investment relative to an individual’s own wealth. A small investment by one director could be more meaningful to them than a large investment by another much wealthier director. In addition, paying directors a combination of cash and shares is a neat way of ensuring directors are aligned.
However, as the report highlights, sometimes there can be too much skin in the game. A high percentage ownership of the share register by related parties, i.e. the investment manager, families and directors, can lead, and has in a number of instances led, to less than ideal standards of corporate governance. In the interest of space, we won’t dwell on the main culprits of the past (the report mentions a few examples). Instead, our concern is that those investment companies with an overly large related party ownership creates a perception that the company is managed more in the interests of the manager and directors than for minority shareholders. It is therefore no coincidence that some of those companies with the largest amount of skin in the game are also trading at the widest discounts in their peer groups. A low expectation that the directors will do anything about prolonged periods of poor performance will deter buyers and discounts will widen or stay wide.
A further concern for minority shareholders in companies with a large, connected party ownership is last year’s change to the UK listing rules. Previously, related parties either didn’t vote their shareholding or sought shareholder approval before making a significant change to the company’s mandate. Under the new rules, related parties can vote their shares on a related party transaction and it no longer requires a prior shareholder vote or circular. Material changes to strategy can now be proposed with only the directors and corporate brokers confirming to the market that they believe the terms are fair and reasonable.
The Investec report contains a load of really useful data that we use as part of our due diligence when meeting managers and directors of investment companies. However, as we’ve hopefully explained above, drawing simple conclusions from the statistics is not straightforward.
Daniel Lockyer – Senior Fund Manager
For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC25424
