Should skin in the game be voluntary?

By Morningstar |  09-06-21 | 
 

Securities and Exchange Board of India (SEBI) recently mandated that 20% of the net income of fund managers and key employees of a fund house should be invested in the scheme where they have oversight/role.

The compensation invested in the scheme would be proportionate to the scheme’s assets under management. The money will be locked in for three years. The rule comes into effect from July 1, 2021.

In a podcast with Moneycontrol, Kaustubh Belapurkar, Director, Manager Research, Morningstar Investment Advisers India, shared his perspective on the rule.

India is the only country that mandates skin in the game

Morningstar tracks 26 markets and we have observed that only four markets which include India require disclosure of fund manager’s investment in the funds that they manage. The other three markets are United States, China and New Zealand. India is the only market in the world that requires fund managers to mandatorily invest in their own schemes.

Some flexibility required

We do positively view asset managers mandating fund managers to invest in their own funds as a good stewardship practice. Having said that, it is worth noting that the individual risk profile of some managers may be different from the risk profile of the scheme(s) they manage.

It could very simply be that the fund doesn’t suit that manager’s personal situation. There’s no sense in a 30-something manager investing heavily in his short-term bond fund.

Conversely, a fund manager may be heavily invested in his fund. But that doesn’t mean it’s a great fit for your portfolio. A fund manager’s style may be way too aggressive for your liking, even if he has all his savings in the fund, you may still want to steer clear.

There could be some flexibility. For instance, instead of mandating fund managers to invest in the funds managed by them, they could be asked to invest in a few funds of their choice within the fund house. This will show to investors that which funds are being preferred by employees. That said, it is not a buy signal for investors but it gives an indication that the fund managers like these particular funds.

The risk may not come down

The risk profile of the scheme may not come down just because the fund manager is investing in the funds managed by him/her. We believe the way the funds are managed will remain the same as fund managers will invest based on the investment strategy and objective of the fund.

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ninan joseph
Jun 12 2021 05:55 PM
 In my view, instead of individuals, the AMC should be parking part of the capital in the fund they are coming out with. Profits of AMC a portion by default should be ploughed back into the business. (why should a staff be challenged when the AMC give targets which are unheard off).

Off the record, this is the second time, this topic is being brought up by morning star - I sometime wonder if there is any hidden agenda behind this. Sometimes all this makes me feel whether it would be prudent to even look at the reviews you guys give out.
SOUMEN DEY
Jun 10 2021 11:18 PM
 Ever since this rule was promulgated, Morningstar has been critical directly and indirectly. You have a right to your opinion. Somehow the arguments are not adding up. "It could very simply be that the fund doesn’t suit that manager’s personal situation" & "The risk may not come down". Seem like faulty reasoning.

Your American office keeps tom-toming skin in the game. Will they endorse your opinion? Please publish a piece written by the America office of Morningstar where they have endorsed your opinion.
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