Consistent performance and better value top consumer expectations of the investment industry. Innovation ties with better value as the second highest expectation as consumers seek innovative investment opportunities and new tools to easily access their accounts.
The implosion of stock picker Neil Woodford’s fund empire dominated the financial media in 2019 and has since raised significant questions for the UK’s fund management industry. But what does it tell us about the future for star fund managers and the global investment industry overall? Over the years, many starry-eyed DIY investors have ploughed money into the funds of so-called star managers, with little to no thought about the actual investment strategies or underlying assets. They assumed that a flawless track record would ensure success and bring them fortune.
This is perhaps no truer than in the case of Neil Woodford, who over the past two decades built up an unrivalled reputation as one of the best-known fund managers in the UK. In the process, he became one of a select group of “superstar” managers and earned himself a CBE — the highest-ranking Order of the British Empire — for services to the economy. Whilst at Invesco Perpetual, where he controlled over £15 billion ($18.5 billion) in assets, Woodford was renowned for his contrarian approach, which famously allowed him to avoid the worst of both the 1990s dot-com bubble and 2008 financial crisis. In the eyes of many, he was simply untouchable and without peer.
So, it was of little surprise that when he departed Invesco to set up his own shop (Woodford Investment Management LLP) in 2014, investors voted with their feet — and wallets — and blindly followed him in droves. But this year his fortunes turned. Following a series of poor stock choices and concern over a period of sustained below-par returns, Woodford made the unprecedented decision to block investors from making withdrawals from his flagship equity income fund — a move meant to prevent a fire sale and buy him time to divest from illiquid holdings.
This would be an alarming move in any circumstance. But what caused the most concern is the fact that Woodford’s fund has been widely marketed, if not recommended, as a best buy, to retail investors through well-known fund platforms or supermarkets. Until recently, it received nearly unanimous praise from UK consumer and industry media. Many of these retail investors would more than likely have expected to be able to buy and sell as they please, without perhaps knowing that withdrawals were not quite as straightforward as other UCITs funds, and certainly not instant.
In Woodford’s case, his exposure to unlisted, illiquid assets meant that he simply couldn’t match the rush of investors seeking to redeem their investments. And so, he closed the barn door to prevent more horses from bolting.
But what received perhaps the most widespread criticism — and prompted the UK’s financial regulator the Financial Conduct Authority (FCA) to step in — was Woodford’s refusal to waive his management after he suspended withdrawals, netting him a daily income of c. £65,000. One suspects that Woodford’s agreement not to take any income or dividends during the suspension
meant little to the investors who had their money trapped in an underperforming fund.
To complicate matters further, one of Woodford’s biggest backers, retail platform Hargreaves Lansdown, continued to promote the fund on its best buy list right up until the day it was suspended — which affected roughly 300,000 customers. The regulator is now also investigating the investment platform’s role in the crisis, examining why the fund continued to be one of Hargreaves Lansdown’s top picks despite a torrid performance run. This doesn’t just shine a spotlight on the UK’s leading fund platform. It also prompts intense scrutiny over the wider manager and broker relationship and the validity of industry best-buy recommendations — all trusted sources for UK investors. So how does this saga end? After months of trying to reposition the holdings in the portfolio to more liquid stocks, attempts have not been sufficient to allow reasonable certainty, and the fund’s administrator, Link Asset Solutions announced in October 2019 that the frozen equity fund would be down as soon as it is practically possible, and Woodford was consequently fired as fund manager, signaling the end of his career as a top flight fund manager and his cult status. Such a seismic move will without doubt shake the fund management industry — and it’s so called stars — to the core.
The sell-off will begin in January, and it will most likely be months before the assets are sold and proceeds returned to investors. The equity income fund has now become the worst performing fund in the city, with investors suffering close to a 27% loss in the last 12 months, and c. 17% since the fund’s launch. Woodford aside, let’s look at the wider issue. Any market battling the effects of a low interest rate environment will see retail investors turn to less traditional assets and funds in search of greater returns. The contradiction here, however, is that some investors still expect instant access and the ability to sell and withdraw funds whenever they wish. This trade-off between liquidity and long-term returns needs to be better understood by mainstream investors and
better communicated by managers and advisors. Clearly, communications and marketing professionals have a role to play in ensuring that funds are marketed responsibly, and in reinforcing the importance of a long-term investment mindset.
Many now point to the Woodford debacle as further proof that retail investors should ditch active managers entirely and concentrate on passive ETF funds to deliver value, especially pronounced given that new research for the Financial Times suggests platforms’ best-buy active funds overwhelmingly underperform cheaper tracker funds.
For those harbouring doubts over the true value of more costly active funds, could this be the nail in the coffin? Indeed, FleishmanHIllard’s own Authenticity Gap research reveals that better value is the most important expectation consumers have when evaluating companies in the investment industry — making up almost one quarter of industry expectations.
This could potentially open the door further to low cost new entrants and fintech players who offer an accessible alternative investment approach to established firms. And there may well be a fresh opportunity for these disruptors to capture new investors and steal a march on the competition through bold marketing, engaging content and authentic communications.
This is not a UK-centric issue. The same scenario will no doubt play out across other markets. What remains to be seen is if/how some active managers can stage a comeback, or whether recent episodes have made a lasting dent in the faith we place in advisors and platforms’ recommendations. But it’s undeniable that investors around the globe will no doubt place even more scrutiny on the investment platforms and managers they choose — opening the door for disruptors who may be more attuned to the next generation’s investing mantra.
Liz Willder and Ludo Baynham-Herd, Corporate Communications & Financial Services
For more on the challenges facing the Financial Services industry download our latest report ‘We Are All Invested‘. The report offers financial services companies a look ahead to the challenges and opportunities that exist for the sector in 2020. Grounded in the expertise of FleishmanHillard Financial Services and Reputation Management counselors from all over the world.