An enigmatic fund manager may work well in the press, but fund boards need open, honest and engaged dialogue with both the investor and their team to ensure proper governance is upheld.
This blog is an extract from a longer and deeper analysis in to a range of contemporary governance issues facing the fund management industry, and FBC members can access this analysis via the Research section of the Member Portal.
By JB Beckett
The fall of Neil Woodford has, perhaps more than with any other UK fund manager, shown the “star manager” syndrome in all its perverse glory. Cowley might be the base of operations of Woodford Capital but, as a child of the 70s and 80s, the ‘Cowley’ that first comes to my mind is the cutting Scottish voice of Cold War spy boss, George Cowley, in CI5 Professionals. Just imagine his dulcet tones, as a Fund Board Chair, reverberating down the long oak table.
“They lit a torch last night, a small one. But fire spreads, fast! That’s why this is a CI5 job, we’re the firefighters.” G. Cowley.
So true. From hero to zero in just a matter of months, the former darling of the front pages has been making headlines for all the wrong reasons since rapid redemptions forced his boutique to shutter one of his flagship funds.
Away from the noise of the active-passive debate where; facts are cheaply sacrificed for casting aspersion, the panto folly of the media, the told-you-sos, dog fund howlers and indolent adviser buy lists, the debacle serves to highlight several problems that fund boards across the entire industry may have to face.
Post Asset Management Study, it has also given a good indication where the UK regulator is now focusing its gaze – and has shown how it may not be afraid to make examples of those that slip up.
Blame game
The Financial Conduct Authority CEO Andrew Bailey pointed to Link as being accountable to its operational rules, over and above the stock-picker himself. Whether a third party Authorised Corporate Director (ACD) or in-house fund board, the FCA is going to be keeping a close eye on their activities. Better governance was the reason for these newly co statutes boards to be created, so they have a reputation to now forge and uphold.
Herding
While an independent non-executive director sitting on the fund board of a so-called “star manager” may think they have won the top job, there are significant issues to note that could pass a middle-of-the-road investor by and the not so small matter of personal and joint liability.
Old school book-building lies at the heart of the problem. Winning hearts and minds of the media – and often, therefore, fund selectors – can lead to rapid inflows to a strategy and/or firm that may not be ready for the deluge.
Fund boards must keep on top of surging flows into a fund, and ensure the middle and back office, and trading book, can cope. Redemptions can come just as quickly, putting even more pressure on a trading team. It is up to the fund board to ensure the mechanics are in place and operational.
Markets can go up and down, but it is liquidity rather than volatility that is one of the most important governance considerations for fund boards. Volatility is capricious and may hit or boost short term performance but a lack of liquidity in its asset range can hit a fund much more permanently.
Super-tankers
For fund boards overseeing the largest asset pools, there are additional considerations. “Super-tanker” funds, due to their size, can effectively create their own market if they decide to buy or find themselves price-takers if they need to sell securities in significant numbers.
Fund boards need to be particularly aware of how the operations within these super-tankers work, and whether their actions are impacting their own performance.
Tough questions
Uncomfortable, maybe, but asking tough questions of people who may be unwilling to answer is a key part of a fund board’s role. Diplomacy is key, but firm oversight is vital to ensure – and show the regulator – fundholders’ interests are being served at all times.
For both fund boards on the payroll of the investment house and third parties acting as contractor, evidence of questioning without fear or favour is going to be demanded by the regulator in the event of a problem.
An enigmatic fund manager may work well in the press, but fund boards need open, honest and engaged dialogue with both the investor and their team to ensure proper governance is upheld.
The future
After implementing rules that call for such strict oversight, do not expect the regulator to take a step back. Fund boards have been given significant responsibility – and it is up to them to ensure they carry it out to the full. Time to call in the Professionals.
JB Beckett is an Independent Member of the Royal London Group Investment AdvisoryCommittee and Independent Non-Executive Director of Scottish boutique SVM Limited. JB is also Emeritus of the Association of Professional Fund Investors, Advisory Board member including the Transparency Task Force, guest lecturer and author including ‘New Fund Order’ about the dysfunctions and digitalisation of fund management, first published in 2015.
Great call to arms for fund directors to start earning their money. An issue that needs to be addressed though is around education and boards’ skill sets. Are all fund directors knowledgeable in the area of fund oversight: Fund mandate, Liquidity, VaR, Leverage, Performance, Risk (product, fund, investment), Target Market, Value Assessment etc to be able identify when something is not quite going in the right way? What kind of management information is required for fund boards to carryout their function? Will iNEDs ask the rest of the board those difficult questions around potential conduct risks? The FCA will definitely look to see how fund boards can up skill themselves – CPD, minimal qualifications etc. But what about the underlying investors how can they have a say?