Can you still trust your Fund Manager?

October has not been a good month for fund managers (the people who make the investment decisions that dictate how well your savings and investments perform).

There have been two very high profile resignations – one as a result of a Sunday Times investigation, the other from a Panorama exposé. Unsurprisingly, clients have been asking us questions, so we decided to write this short article outlining what has happened and, more importantly, dealing with any worries clients may have.

The Downfall of Neil Woodford

There cannot be anyone in the financial services industry who has not heard of Neil Woodford. He began his career with Reed Pension Fund and TSB and then, aged just 27, became a fund manager with Eagle Star. In 1988, he moved to Invesco Perpetual where he really made his name. Woodford ran their Income and High Income funds, with combined assets approaching £25bn.

He gained a reputation as one of the UK’s leading – if not the leading – fund managers, famously avoiding the worst of the dot com bubble in the 90s and the 2008 financial crisis.

In 2014, he left Invesco Perpetual to form Woodford Investment Management, operating both a listed investment trust and an equity income fund. But in March 2019, the Sunday Times launched an investigation following two years of poor performance that had seen fund assets contract by more than £5bn.

The investigation found that Woodford’s flagship fund held less than 20% of its assets in FTSE 100 companies, compared to more than 50% when it was formed. More than 20% of the assets were in much riskier Alternative Investment Market companies. The Equity Income fund was suspended in early June, following the inevitable withdrawals by investors subsequent to the Times’ investigation.

St James’s Place terminated Woodford’s contract to run three of its funds – with assets of £3.5bn – and the Financial Conduct Authority launched a formal investigation. On October 15th the company announced that the Equity Income fund would close, and on the following day Neil Woodford announced that he would resign from his remaining investment funds and ‘close the company in an orderly fashion.’

Meanwhile, at Capital Group…

This time it was an investigation by the BBC Panorama programme rather than a newspaper, but the end result was the same.

Mark Denning was one of Capital Group’s leading fund managers: he’d been with the company for 36 years and helped to manage some £229bn of assets. The allegations from the BBC programme – screened on October 21st – were simple: Denning had used a fund based in Liechtenstein to buy shares in companies his funds had backed.

Despite denying any wrongdoing, he swiftly resigned, with Capital Group equally quick to release a statement: We have a Code of Ethics and personal disclosure requirements that hold our associates to the highest standards of conduct. When we learned of this matter we took immediate action.

Patently, investment fund managers are not supposed to invest in the same companies as their funds, as they could potentially profit at the expense of investors. Given the Panorama investigation, neither Capital Group nor Mark Denning had any choice as to what to do.

Our Thoughts

It has been said that Neil Woodford’s spectacular downfall was caused by a lack of scrutiny. At Invesco Perpetual, wrote the BBC, ‘he was challenged on his investment decisions.’ The inference was clear – when it was his own name over the door, there was not the same degree of scrutiny.

Rest assured that scrutiny is exactly what we provide on your behalf. It is a fundamental part of advising you on your savings and investments that we match any advice we give you to your investment risk profile. That means your investments are spread geographically, by sector and – yes – by fund manager.

We also speak to fund managers regularly, and meet them at industry events. Almost without exception, they are hard-working, diligent and have nothing but the best interests of their investors at heart. Two such high-profile cases coming close together has inevitably focused attention on fund managers – but it does not mean that the two cases we’ve outlined are representative of the wider profession.

Rest assured that we will continue to monitor the performance of your savings and investments as diligently as we have always done – and that we will continue to meet with and scrutinise the fund managers we trust to look after our clients’ money.

Hopefully these brief notes will have set minds at rest and answered any questions you may have had. But, as always, if you would like to discuss matters with us in more detail, we are never more than a phone call or an email away.