Indian asset managers are waking up to the idea of having skin in the game (i.e. investing in their own funds) to instill greater confidence among investors.
After Parag Parikh Mutual Fund started disclosing its employees investments in its own fund, Kotak MF recently announced that it has mandated that its employees can invest only in Kotak schemes when they make a mutual fund investment.
The sponsors of Motilal Oswal have invested Rs. 1,400 crore in the MOSL’s equity funds. “Our idea was to align with investor interest. The surplus money of Motilal Oswal Securities and other subsidiaries is also invested in our funds. Our founders Raamdeo and Motilal have also invested a large chunk of their savings in our equity funds,” said Akhil Chaturvedi, Senior Vice President & Head – Sales, Motilal Oswal Mutual Fund.
While some fund houses have voluntarily started this initiative, the push has also come from the regulator. Last year, SEBI mandated fund houses to put a seed capital of 1% of the amount raised (subject to a maximum of Rs.50 lakh) in all open ended schemes during its life time. This practice is already followed in US fund industry from a long time. According to Investment Company Institute, an association of U.S. investment companies, fund houses are required to have at least $100,000 of seed capital in each new fund before distributing its shares to the public; this capital is usually contributed by the sponsor or adviser in the form of an initial investment.
Many fund managers globally are known to invest in their own funds. According to a foreign media website, Bill Gross (former bond fund manager at Janus) had invested $740 million in his own funds. Legendary investor Warren Buffet is known to assure his investors that most of his company directors have a major portion of their net worth invested in the company. “We eat our own cooking,” states Berkshire Hathway Owner’s Manual.
A New York based AMC Catalyst Fund has gone a step further to launch a fund called Catalyst Insider Buying Fund which invests in companies where corporate insiders (CEO, CFO, directors, etc.) are purchasing their own company stock. The fund’s thesis is that corporate insiders know more about the prospects of the company than anybody else.
Like foreign fund managers, many Indian fund managers also eat their own cooking. India’s top fund manager Prashant Jain invests his savings in his own equity funds. Another well regarded fund manager Kenneth Andrade has also invested his money in the funds managed by him.
While having a skin in the game instills certain confidence that fund managers have faith in their own funds, should it be the sole criteria to recommend funds for your clients? Does it result in better fund performance?
Choosing a fund solely on this criteria of having skin in the game is not advisable but it can be a good starting point to filter one fund over other. “I don’t think that should be the sole criteria. Funds do well because of a number of reasons,” said a CIO of a top fund house.
Hemant Rustagi of Wiseinvest Advisors says “It is good that employees and fund houses are investing money in their own schemes. However, that may not necessarily result in better fund performance. The AMC will ensure that the fund manager performs irrespective of whether his/her personal investments are in the funds managed by him.”
M S Shabbir, a Hyderabad based advisor says “I would not recommend a fund just because the sponsor is investing in their own schemes. Investing a tiny sum in a large fund doesn’t make any difference nor does it show any commitment. In case of MOSL, the sponsors have invested a sizeable corpus in the funds which is a good sign.”
Let us know your views.
