In an open letter shared on its LinkedIn, Blackwattle Investment Partners called on the funds management industry to acknowledge the inherent risks, conflicts, and the distraction posed by personal trading.
The letter, signed by managing director and chief investment officer (CIO) Michael Skinner, reads: "Personal trading by fund managers is a conflict and a significant distraction."
“It is undoubtably not congruent with a client’s best interest. The practice should be abolished not just in funds management but also across investment banking, equities research, and trading."
Noting that humans are “inherently self-interested”, Skinner said fund managers “can be tempted to prioritise personal gain over client interests” despite what regulatory bodies like the Australian Securities and Investments Commission might “hope and wish” for.
“Consider this scenario: suppose I have personally invested significant amounts of my own wealth into a publicly listed company, say Qantas. Now, imagine this company loses its CEO, the investment proposition changes, or it becomes overvalued. Would I recommend that the fund to which I am responsible, sells its investment, thus potentially causing the share price to drop and leading to my own financial loss?
“This is a moral and ethical dilemma.”
Skinner goes on to argue that fund managers are also likely to dedicate more time to personal trading than managing their designated funds.
“Consider a reporting season scenario where multiple companies release their results and host calls simultaneously. If I have a personal investment releasing results at the same time as a portfolio company, it is likely my attention will be diverted towards my personal gain. This distraction can negatively impact the performance of the portfolio and is clearly not in the best interest of the fund’s investors,” he said.
Ultimately, he believes a ban needs to be implemented on personal trading to simplify internal compliance and reduce the risk of compliance breaches.
“At Blackwattle Investment Partners, we have implemented a strict no-personal-trading policy. This policy underscores our commitment to always act in our clients’ best interests. We call on regulators, industry bodies, and fellow fund managers to also ban the practice,” Skinner said.
“To our clients, from large superannuation funds to individual investors, we urge you to hold the industry to account and reject the practice of personal trading by any and all fund managers.”
Blackwattle Investment Partners officially launched in Australia in May last year with initial seed capital of up to $60 million and six years of funding.
Described as a “new generation, highly aligned, Australian investment manager”, Skinner said at the time that Blackwattle has sought to attract the best investment talent in Australia.
“We’ve flipped the traditional model and removed the key person risk. We don’t believe in a concentrated leadership style – everyone is a meaningful equity owner, and we are all partners together,” he said.
“We invest alongside our investors and clients, with personal capital committed and corporate profits reinvested into our portfolios, there is no personal trading.”
