The fall from grace of a once high-performing London fund manager is likely to have serious implications for the wealth management world.
When Neil Woodford left Invesco Perpetual after 25 years in 2014, to set up on his own, his name was the most talked about at fund management summits around Europe. At the height of his pomp, he managed nearly £25bn ($31bn) and could do no wrong.
Many investors stayed with him when he established his own boutique, Woodford Investment Management, which oversaw more than £10bn. But he was forced to restrict redemptions at the beginning of June 2019, after two years of poor returns led to withdrawals. UK wealth managers St James’s Place has terminated its contract for Mr Woodford to manage £3.5bn of its funds, while shares in another leading player, Hargreaves Lansdown, have lost 15 per cent due to their clients’ exposure to the firm.
This is not the first time a so-called ‘star’ fund manager has imploded. Yet after a short period of heightened conservatism, increased due diligence and more intense scrutiny of investment objectives, wealth managers typically go back to their old ways, claiming they have customers’ best interests at heart, while doing little to protect them. Will the story of the ‘Woodford files’ prove any different?
“This is the last gasp of the star fund manager culture, which has been withering on the line for a long time,” warns Amin Rajan, CEO of the Create consultancy group. He points to dramatic “rise and fall” stories involving the likes of Anthony Bolton at Fidelity, Bill Miller at Legg Mason and Bill Goss at Pimco. All of these, like Mr Woodford, were once unassailable.
“Every one of these fund managers raised expectations to a level which could not be fulfilled,” says Mr Rajan, suggesting regulators must look at the role of intermediaries such as wealth managers in promoting so-called ‘blockbuster’ funds and shortlisting them on lists of preferred partners through a ‘guided architecture’ format.
Pioneered at the likes of Commerzbank and Deutsche Bank at the turn of the millennium, before being adopted by private banks across Switzerland, Italy, the UK and the Benelux countries this system fast became the accepted model of relationships between asset managers and their private bank distributors.
But it led to pressure to perform. Fund managers like Mr Woodford don’t like pumping money into illiquid stocks, says Mr Rajan, but they do this to please clients who fail to recognise the reality of a low return environment and continue to believe the old, now disproven tenet of investment: that higher risk creates higher returns.
Not up to the task
In their quest for certainty, many private banks globally still adhere to these old school premises laid down in the ‘Modern Portfolio Theory’ of the 1950s, even though the global financial crisis of 2008 demonstrated these theories now have little relevance.
Alan Miller, once a leading hedge fund manager with New Star, now running SCM Private, is scathing about the approved lists of funds compiled by banks.
“These lists and basis for investing ensure clients receive the lowest common denominator for investment, whereby a committee has approved funds simply because they are large, fashionable and have just performed well,” he says. “The lack of robust interrogation and due diligence into their strategies, benchmarks, liquidity and true fees has rarely delivered a premier service to private clients.”
This weakness in selection is coupled with toothless regulators such as the UK’s FCA, says Mr Miller, which he says “has been the lapdog of the investment industry and completely failed to protect clients’ best interests”.
The problem with fund selection, according to James Bevan, head of investments at CCLA, is that it is based on “yesterday’s news”, with flows simply directed to funds that have delivered healthy returns to clients.
“There needs to be a richer and deeper understanding of why some managers can and have delivered good returns relative to markets overall and why some have not, and a discerning assessment as to what likely lies ahead, and why,” believes Mr Bevan.
These observations highlight what has been new about the latest debacle: that it is no longer just the brands of fund managers that suffer from poor performance and lack of liquidity, but also the reputations of banks and wealth managers that promote the funds. Clients must also take more responsibility, says Mr Bevan, by only rewarding banks with their loyalty if they are provided with quality advice and fund selection skills.
“Clearly this episode hasn’t just hurt Woodford, but will have damaged end client relationships for fund selectors that had Woodford in their portfolio. This has been very public around Hargreaves,” says Chris Chancellor, a senior director at Broadridge Financial Solutions, which provides data analysis for the financial services sector.
The toxicity of this topic is demonstrated by the fact that six major fund distributors, including Hargreaves Lansdown, invited by PWM to answer questions on this issue all declined to comment.
Room for improvement
History tells us that lessons are seldom learned from these episodes. But we do know that communication between banks and clients must improve, with the former telling the latter exactly why they are including particular funds on their ‘best buy’ lists.
We also know that fund performance needs to be regarded as a longer-term phenomenon, not a monthly measure. The intense media attention to Mr Woodford and his funds may have provoked more withdrawals than necessary, say some commentators.
“Fund investing is a long-term game and a couple of years of underperformance should not become a drama,” says Furio Pietribiasi, CEO of Mediolanum Investments, which outsources a large share of its assets to external fund managers.
“It is like when a star striker at a football club doesn’t score for a couple of games and the press is questioning if their career is finished.”
In the sporting arena, the pride of the striker is hurt. But in the case of fund management, there can be serious repercussions. While the losers are likely to be the clients, whose investments lose value, the winners are likely to be the ETFs. They are cheap, transparent and generally liquid. But their main advantage is their lack of personality and celebrity status and the expectations which surround these handicaps.
