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The Fund Management Industry’s Biggest Conflict?

26th November 2021

There are so many variables that go into our fund selection process. Perhaps one of the most significant over the long-run and one that is always hovering in the background, especially when a fund becomes popular and gathers assets, is the ownership structure of the fund management company itself.

We believe that there is an inherent and very uncomfortable truth in our industry: there is a conflict between the objectives of the investors in the fund, and the objectives of the shareholders of the fund management company itself.

The truth is, regardless of the asset class, there is a point at which a fund’s size gets too big. Here, “too big” is defined as the point at which the fund manager’s process is no longer viable and performance suffers. This is simply because as a fund grows, the harder it is to maintain positions in less liquid securities. Either the manager takes on a lot more liquidity risk, or moves away from less liquid securities. In doing so, the manager is compromising their investment process and almost always compromising client objectives too.

Meanwhile, almost all fund management companies’ business models rely on growing revenues via growing assets. Revenues are derived from the annual management charge (AMC), levied as a percentage of total assets. Shareholders want to see profits grow, and the main driver of that is growth in assets. Hence it is really important to check whenever one invests in a fund (especially one where the fund management company is listed with demanding investors) that the fund manager is protected from demands to grow the fund beyond the point at which he or she is comfortable.

I can tell you, the history of our industry is replete with examples of fund managers’ track records suffering from taking on too many assets. Often the fund manager leaves, and, having learnt the lesson, starts working for a company whose shareholding is much tighter, often compromising only of staff, where capacity controls are explicit and encouraged.

This is why you often find that our Hawksmoor Funds are populated by funds run from smaller fund management companies (or “boutiques” to use the jargon) rather than funds run from the listed industry giants. This is not to say that these fund management houses do not run good funds. Indeed, there are plenty! Often these companies attract industry-leading talent. But we are always especially mindful of the size of these funds, and monitor them especially closely.

Incidentally, this issue also ties in with Dan Cartridge’s recent blog on performance fees. If a fund management company’s business model relies on revenues from performance fees as well as AMC, then that company will be less motivated to jeopardise performance at the expense of size. It is another reason why we are open-minded about performance fees and here they serve as a tool to align the interests of shareholders of fund management companies and investors in the funds more closely.

Thus, you won’t be surprised to learn that the Hawksmoor Fund Managers’ multi-asset range is itself capacity constrained at c. £1bn across the three funds. Although we do not levy performance fees (thus we are effectively capping the revenue-generating potential of the Funds), we have very understanding shareholders (which includes ourselves). As a fund management team we would much rather reduce our own stress levels safe in the knowledge that we are not running too much money. Sleep-at-night-ability is a major factor for a healthy team!

Ben Conway – Head of Fund Management

Ben Conway

This financial promotion 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. HA4654.

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