I have never been a strong believer in the notion that a fund manager should invest their clients’ assets ‘as if it were their own money’. It is a neat heuristic that I am not sure works consistently in practice. The reality is that there is likely to be a gap between a fund manager’s personal and professional investments, and that difference can tell us a lot about an investor and the environment they operate within.

If we assume consistent objectives, why would a professional investor run their own portfolio in a manner that is different from their clients’? Primarily, because the constraints are distinct. By this, I don’t mean formal aspects such as the range of available assets or fees (although these do matter), but rather the informal restrictions that shape investor behaviour and decision-making. Constraints have a huge impact on investment outcomes but are typically ignored or hidden.

Let’s say a fund manager runs their own portfolio and also a fund for a large asset manager; the goal of both is to generate a 3% real return over 10 years. Why might the approaches be different?

Career risk: The most obvious driver is the spectre of career risk. Professional investors are optimising for two things: delivering on the objectives of their fund over time and keeping their job while they attempt it. Three years of underperformance doesn’t matter for a fund manager’s personal portfolio, but it could matter a great deal for their career. The influence of this factor will depend heavily on the individual.

Keeping their clients invested: While managing career risk may seem like a rational but somewhat self-serving endeavour, there is a closely related behaviour whereby a fund manager adopts a different approach for their clients in an effort to keep them invested. There is no point in having a great investment strategy that nobody can stick with. An investment approach that can deliver 15% annualised over 10 years, but will at some point underperform by 30% over three years, could be ideal for their personal portfolio; it is just that their fund might not have many assets left at the end of the 10 years. Professional investors should seek to run money in a way that keeps clients invested (for the right reasons).

Team over individual: Most professional investors work in teams. The investment process adopted and decisions made are the result of interactions within that group, rather than a reflection of one individual’s ideas. When a fund manager invests for themselves, they can pay attention to, or ignore, their colleagues as much as they wish. It is reasonable to assume that we will overweight the value of our own opinions.

Living through outcomes: Nobody has to live through the short-run outcomes of their personal investments; we can check our portfolios as infrequently as we like. When fund managers make decisions professionally, however, they have to experience those outcomes on a daily basis and are subject to constant scrutiny. Even if they have a resolute belief that an underperforming investment idea will work over the long run, this conviction might be tempered if they have to justify it to a committee every quarter. The emotional toll can be heavy and one that many people would rather avoid.

Managing for the collective: When a fund manager makes investment decisions for their own portfolio, they are doing so with ‘perfect’ knowledge of the person they are investing for and to whom they are accountable. That is entirely different when those decisions are being made for a sizeable, largely unknown and diverse group of people. Managing for the collective is different from running money according to your own personal circumstances and views.

Norms and conventions: Personal portfolios are unseen, so there is absolute freedom to take decisions that may seem odd, anomalous or imprudent relative to industry conventions. This could lead to value-creating liberation or some unmitigated disasters (which clients may be spared)

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It is easy to assume that the constraints creating a gap between how a professional investor runs their own money and their funds are negative for clients – as if they are receiving an impaired version of a ‘pure’ investment strategy. I don’t think this is always the case. While some constraints can be an impediment, others can serve as an effective limit on sometimes erratic or self-centred individual behaviour.

There is no blanket answer as to whether a gap between personal and professional investment is positive or negative; it is simply important to understand whether it exists and why.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).