20 Jul 2021 4 min read

Skin in the game: does it matter?

By Emiel van den Heiligenberg

In April, the Securities and Exchange Board of India (SEBI) took a bold step: mandating that key employees of asset managers invest about 20% of their salary in the schemes they run or oversee. A direct order to fund managers to have skin in the game!



Clients often ask me whether I have invested money in my own funds. The answer is yes: I have invested most of my personal wealth (and that of Mrs van den Heiligenberg) and pension in LGIM’s multi-asset funds, and I know I’m not the only one in the team who is “all in”.

LGIM facilitates this as well, as my pension defaults into multi-asset funds. My deferred compensation is also linked to the performance of LGIM funds; across the business, fund managers are thus linked to the strategies where they are named fund manager.

For me, backing my own funds is an easy decision. I work in multi-asset portfolios and my funds, by definition, aim to be well diversified and are aimed at different risk profiles. For most risk appetites, time horizons and investment objectives, there should be a suitable fund available. This might not always be the case for fund managers in individual asset classes, though.

Perhaps more importantly, I passionately believe in what we are trying to achieve in LGIM’s multi-asset team. We are striving for investment excellence and I’m proud of the talent I work with, the rigour of our research and investment process, and how we manage risk for clients. Investing directly in the team is the best way to show that this belief is much more than just rhetoric.

The fact that there is an alignment of interest between me as fund manager and custodian of client money and the clients makes sense to me. Though we all should consider managing money for clients as a great honour, and I feel pretty miserable if I think I may have let clients down, I believe it helps clients in these situation to know that my savings and those of Mrs van den Heiligenberg are at stake as well. It builds trust between clients and the fund manager.

The investment platform Interactive Investors has some interesting stats on what client think on this topic: “A survey of 1,800 visitors to our website found almost nine in 10 (88%) say it should be mandatory for fund managers to disclose whether they invest in the fund they manage. In addition, 85% said skin in the game would align fund-manager interests with their own. Only 11% thought it could create a conflict of interest and encourage fund managers to take either too little or too much risk.”

Are there any downsides? Is there such a thing as too much skin in the game?

I can see a few. Firstly, behavioural biases might slip in. The idea is that in the heat of a crisis, a fund manager might be less ‘cold and calculated’ when his or her personal money is at stake. I think every fund manager feels some “career risk” during a crisis, irrespective of whether they have personal money at stake. I think experience helps to mitigate this and so does process. Veteran fund managers should have learned to recognise increased stress levels and mitigate the behavioural impacts by drawing on their experience and by sticking to a proven process.

Secondly, some people point towards the idea that co-investment by the fund manager can become a bad thing if the fund becomes a pet project suited to the fund manager’s risk appetite and not that of clients. This is more a risk in closed-end funds, in funds where liquidity is limited, and/or in firms with potentially less strong governance, in my view.

Lastly, there is a point close to my multi-asset heart. The flip side of skin in the game, or going “all in” on your own fund, is that it flies in the face of the benefits of diversification. Though this is true, I think the sense of being exposed to success and failure is exactly what defines the alignment of interest between fund managers and clients. At some moments in time it might hurt a little and the fund manager might feel exposed, but that’s intended – and they are feeling the same pain as their clients.

Does it matter?

Analysts at Investec Securities regularly compile a ‘Skin in the Game’ report focusing on investment trusts. Last year’s report shows that only a fifth of all fund managers of investment companies on the London Stock Exchange held a significant stake in their own funds; a stunning 16% of trusts’ board members had no personal investment in the fund. The report rightfully notes: “This lack of investment does not sit easily with the degree of commitment expected by most shareholders.”

However, though earlier research from Investec has shown that skin in the game is not a panacea for superior returns, academics Ma Linlin and Tang Yuehua published a paper in Management Science, "Portfolio Manager Ownership and Mutual Fund Risk Taking", finding that investors who allocate to a mutual fund in which the portfolio manager is personally invested have tended to be better off. The paper notes that:

“Funds with greater managerial ownership are also associated with lower levels of total risk and downside risk. Overall, portfolio-manager ownership serves as an incentive alignment mechanism and has important implications for mutual-fund investors.”

It is not that dissimilar from academic research on individual companies as well, which suggests a higher probability of companies with large insider ownership outperforming.

All in all, I am a proponent of fund managers with skin in the game. Something similar to the SEBI rules could align interests, help with trust between clients and fund managers, and might help to improve the confidence of investors in the financial industry.

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg