I was thinking about this last night when watching news about the Cricket World Cup. We have heard about manipulation in cricket and what betting syndicates get up to. We’ve also heard how players and anyone remotely involved in a game are not allowed to bet on matches.

We’ve heard, this weekend, that people had been evicted from Saturday’s opening game between the Black Caps and Sri Lanka for “court-siding”.

There seems to be some parallel issues in funds management.

The more I think about this issue and discuss it with others the stronger my conviction is that the funds management industry is sitting on a potential time bomb.

Funds management has to be one of the more competitive occupations in the world with performance being the holy grail – even though we know past performance is no indicator of future performance.

No manager is comfortable being at the bottom of the performance league tables and will work hard to move up the ladder.

Where there is a problem is that portfolio managers are rewarded for performance; many funds take performance fees; and it seems the rules around what portfolio managers are allowed to do in the market are not particularly clear.

As Pathfinder Asset Management director John Berry has been demonstrating in his excellent series on performance fees there are good one and very bad ones.

However, the average investor, and dare I suggest adviser, has little idea what managers are being paid for performance and how these payments are calculated.

The widespread practice of rewarding performance at various levels creates a potentially toxic environment which is going to ferment bad behavior.

It is a struggle, often, to reconcile the cliché that it’s all about aligning investors’ interests with those running the funds.

This is an area of regulation that should be top of the agenda, rather than much of the activity in the adviser markets.

It reminds me that the issue with finance companies was with the product manufacturers, not the distributors. That is a lesson the regulators need to have taken on board.

With regards to Milford I have no idea if they are innocent or guilty.  I have been surprised to see a portfolio manager described as a trader.

The more I talk to people about funds management issues the more questions emerge. Included in the list is: What sort of internal checks and balances were in place? Considering Milford are primarily trading a relatively small universe of stocks there should be sufficient analysis going on to pick up any unusual share price movements – especially when it is get close to reporting time.

It would be interesting to know whether portfolio managers are allowed to trade shares on their own account?

Unfortunately the FMA has gagged anyone from talking about the investigation, so we will have to wait for answers.