Does Canada need to require co-investment disclosures?

Reporting on Canadian fund managers’ personal stakes in funds is spotty, and some say that needs to change

Does Canada need to require co-investment disclosures?
"A portfolio manager's ownership in a fund provides a direct indication of his or her alignment with the interests of shareholders in that fund."

This was a pronouncement made by the US Securities and Exchange Commission in 2004. The following year, the regulator put in effect a rule requiring US managers to disclose their holdings in their own funds.

Today, no such requirement exists in Canada. According to a report on the Globe and Mail, most Canadian fund companies volunteer limited, firm-level information on their managers’ personal stakes in their funds, which is also known as co-investment. However, the reporting is voluntary, unverifiable, and incomplete.

"I think the public is owed this information," said Christopher Davis, director of research at Morningstar Canada. "It's hard to have faith in a manager who doesn't seem to have faith in him or herself."

Morningstar asks Canadian fund firms for co-investment information annually by way of a voluntary survey. Based on this year’s results, AGF Management Ltd. and Steadyhand Investment Funds had the strongest co-investment policies, which have manager investments amounting to two years’ base salary and 90% of liquid net worth as of 2015, respectively.

On the other hand, 75% of National Bank of Canada’s managers had less than one year’s worth of salary invested in the bank’s funds; those numbers, however, apply mostly to funds subadvised by Fiera Capital. Mackenzie Financial reported 45% of its managers having no more than one year’s salary invested in their own funds. CIBC is among a few Canadian fund firms that declined to disclose any numbers on co-investment.

"What better way to align the interests of the fund manager and the investor, than to have the fund manager actually be an investor?" said David O’ Leary, managing partner at Toronto-based Eden Valley Partners. "If you're an investor in the fund itself, you become a voice for the shareholder on things like expenses within the fund. Or how much risk to take on."

Aside from such figures indicating a fund manager’s confidence, some academic research suggests that funds with greater co-investment tend to perform better. A 2015 report from Morningstar also discovered that manager investment has some predictive power.

The OSC has cited privacy laws that preclude such mandated disclosures, but according to O’Leary, that’s not a good excuse. "The real answer is just that there isn't the political will to do it right now. Which is a shame."

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OSC head concerned over non-standard reporting