Skin in the Game

SEBI on investors' welfare

it is a prohibited practice to profit from the stock market and play on the stock exchanges with the non-published price sensitive information available to the company's insiders on the stock exchanges.   If someone uses the private information for the benefit in stock markets, then it is called Insider Trading.

After the recent closure of franklin's six debt funds, reports are leaking that the like in stocks, insider trading like events happened in funds also.  we also came to know that fund managers and fund houses focus is always on their profits and salary rather than investor interest. This is not beneficial to investors.

Do fund managers believe in funds they manage? If yes, do they invest their own money in it? Some of these details are rarely available in the media.  A few fund houses like Kotak etc. following these principles and ask their fund managers to invest in their schemes. many other companies do not give any importance to these principles.   To date, there is no law for this. This is going to change from July of this year. SEBI has introduced rules and new procedures to   be followed from july1.      Let us see the essence of them.

Newly recommended procedures by SEBI with respect to fund managers remuneration- Skin in the Game  

 

1.     Fund managers, senior fund house employees and those involved in managing the fund must invest 20% of their salary in funds they manage.

2.   When the fund manager,  manages two or three schemes, this 20% investment should be in all his schemes, proportionate to total assets under his management.

3.     This 20% allocation investment must be in funds managed by him for three years (Lock in Period of 3 years). They will not be able to withdraw that money before the lock in period. Even if they change companies. These three years lock is applicable

4.       20% of the net salary after all taxes will be invested in this manner.

5.       This procedure is not applicable to Index fund, ETF, overnight funds, and close end funds.  

6.       If the fund manager is not eligible to get this investment, if he is found guilty of any offences,

It is not a new method to pay, based on work which is known in corporate circles as performance-based pay. Making this method compulsory for fund house / AMC team is a good start. This method is known as Skin in the Game.

Advantages

It is believed that this will benefit investors when implemented in this manner as Skin in the Game, while certainly it will not guarantee any performance increase. The expectation is that the fund manager will be very careful and enthusiastic in their investment choices, which will increase the safety /reduce the risk and indirectly help to get good performance. In turn this will help the investors 

Disadvantages 

At the same time, the new proposed system is not welcomed by the fund managers and the fund houses because they are raising some concerns.

1.       A credit fund manager’s 20% lock in investments will be in credit funds only whereas His individual preference may be in equity funds.

2.     20% lock in investments of the Fund CEO/CIO is getting diversified over 20/30 schemes, thus reducing their profits due too much diversification.

3.     Their take home salary is impacted. This may impact heavily on their daily needs or may have difficulty in paying large sums of money, such as home loans.

4.       It may be difficult for them to follow this practice when there is a difference between the nature of the fund they run and the nature of their own likes and dislikes – for example, the Hybrid fund manager may prefer the large cap funds. 

Finally 

This new practice is beneficial to the investors because it will induce good habits for better management of the schemes. It is believed that fund managers will be very careful and avoid losses to the fund.  This is a welcome feature. Let us thank SEBI.