“HL removed Woodford from its Wealth 50 but did not force sell the funds as SJP has.”
But this shows a fundamental misunderstanding of how SJP (costly restricted funds) and HL (costly self-select platform) work!
— Alistair Cunningham (@Cunningham_UK) 6 June 2019
The relationship between Neil Woodford and SJP is over, SJP sacked Woodford as a manager – that is clear. Since 40% of the funds Woodford managed were for SJP, that makes for a difficult business problem for Woodford, he will have to adjust his business. I am told, by IFA friends on twitter that SJP were not investing in a pooled fund – run by Woodford, but in what is called a segregated mandate, where SJP has the right to hire and fire the managers of the assets but does not have to liquidate the funds if they do so.
Nothing has been sold. That’s not how a seg man works. The new manage now just owns all the stuff Woodford bought and is left with the task of unraveling it.
— David Tasker (@mrroboadvice) 6 June 2019
This is comforting , the replacement managers of the SJP funds do not have to sell anything till the time is right, and then they only “have” to sell , if there is an imperative to do so. It is becoming clear that the FCA, the Bank of England (through Mark Carney) and SJP (through their own fund governance) feel that something went wrong, but that is all we know.
There is speculation as to how much change the appointment of a new manager will bring.
Forget the blue chips. The valuations on the unquoteds are about to be severely tested
— Tom Wilson (@mccavfefe) 6 June 2019
As with football teams, a change of manager can bring wholesale change or a little bit of tinkering .
But what I had not appreciated, and here I am just showing ignorance, is that not just the customers but the SJP advisers have very little control over who is managing the money, that is a matter for SJP’s fund governance team and advisors.
Which explains Al Cunningham’s comment at the top of this blog. Where Hargreaves Lansdown clients are responsible for deciding on whether or not to own Woodford funds, SJP clients give discretionary control to St James Place as to who manages their money. Quite different models indeed.
So SJP sacking Woodford means more for Woodford than for SJP and its clients
I’m happy to stand corrected on this. I am learning as I go, but this I would say in my defence. It is very far from clear from the press reports about the implications of the change in SJP’s managers and while I am sure SJP are communicating to their clients, they are not communicating to direct investors in Woodford funds (through Hargreaves and elsewhere).
I remain critical of SJP on its fund governance and in particular on the timing of the sacking which happened only once Woodford had to gate his fund because other investors had voted with their feet.
If SJP owned 40% of assets under Woodford management, how had it not dealt with the problems of illiquidity earlier? It is in the nature of segregated mandates that the entity awarding the job mandates how the fund is managed and has the responsibility to ensure that job is being properly carried out.
That SJP only took action once the gate had slammed following the withdrawal of £260m by a Government body, suggests that SJP were bounced into action. This I find really surprising as it does not suggest an orderly investment governance process.
Woodford did not become a bad manager overnight, I am told by those who know him that he has been aware of the risks of holding high amounts of illiquid stocks in funds that may need illiquidity and he has lived with this risk for some years. I assume that when Woodford was appointed by SJP they knew of this risk too and that particular controls should have been in place to guard against the problems of the past few months.
I cannot avoid the conclusion that not only has SJP let itself and its clients down, but it has failed all Woodford clients, first by not managing its mandate better and secondly by not sticking with its manager when the going got tough.
Too much transparency?
In a very cute series of tweets , Matthew Bird points out that Woodford was a victim of being too public about what he was investing in.
One issue that particularly hit Woodford has been his 100% portfolio transparency. It seemed a great idea to disclose all holdings from an ethical standpoint, but it has made him a target of short sellers which has compounded his woes. I think their intention is to change this.
— Matthew Bird (@mattbird55) 7 June 2019
Now this really is an issue for the Regulator. As I have been writing over the past two weeks, the best way of getting engagement is to tell people where the money is invested.
But if in demonstrating that (an admirable feature of Woodford’s and Terry Smith’s management style), the fund’s investments are shorted by the market, then a number of problems arise
- Companies become wary of being quoted of the publicity
- Managers become wary of transparency
- Investors are returned to darkness and to all the shady dealings that opacity can bring
If what the FCA concludes is that fund managers cannot be transparent about what they hold for fear of short-selling then we have a quite different regulatory issue.
Problems with the fund management model
I find myself reluctantly returning to the position of Robin Powell, the evidence based investor. Chasing returns by changing managers, changing asset allocation , changing investments is a mugs game. Here is Matthew Bird again
Only a hunch, but I expect a lot of this wall of investment money may be redirected away from UK focussed companies/funds into globally focussed co’s/funds chasing past returns, which at some point themselves will run out of steam whilst the domestic co’s/funds bounce.
— Matthew Bird (@mattbird55) 7 June 2019
Which brings us back to John Kay who asks fundamental questions about the fund management model and finds no answers.
It seems to me that being a top fund manager is about as thankless a task as being a top football manager. You will have your moment in the sun but you are unlikely to avoid sunburn, for every Alex Ferguson of Bill Shankly there are 20 once-loved football managers with reputations in tatters. Today’s Klopp is tomorrow’s Morinho.
For an interesting (if speculative) view of the reasons for SJP and Woodford’s falling out, read Matthew Vincent’s article in the FT Lombard column
If anything, Mr Woodford’s relationship with St James’s Place had to end because the duo had become fundamentally incompatible: St James’s Place an ever more conservative City type, but Woodford still the maverick. Their mistake was to stay with each other for so long.
Learning from experience
Well I’m learning as I go on this – thanks to Al Cunningham , Matthew Bird and several others for setting me right and helping me out (even on the little things like names)
Yes, the article should be edited slightly. No funds are necessarily being sold from the SJP mandate, they just sacked Woodford and have employed someone else to run the fund. This will effect Woodford obviously but not to the degree implied. Also it’s Nick Train, not Neil.
— Matthew Bird (@mattbird55) 7 June 2019
The article has been edited slightly! But the thrust remains the same.
- Employing conviction-based fund managers who buy and hold is a good thing
- Transparency of holdings is a good thing.
If Woodford broke the terms of his mandate with SJP, he deserved censure and ultimately sacking. Strong governance of segregated mandates is a good thing and pooled funds need even greater fiduciary oversite. But there is no evidence that he did.
If I am learning about how managers are employed, I can be expected to be pulled up and corrected by good people like Al and Matthew, I learn from being corrected and I hope that those who read my blogs learn from my mistakes too.
What is a bad thing is that many investors are being mucked about and losing considerable amounts of money to the short-sellers because of the collapse in confidence in Neil Woodford and for that – I have to hold those who employed him partially responsible.
If we award managers mandates as long-term investors and sack them when the going gets tough, there have to be good reasons and so far we have not seen those good reasons from SJP. It’s left to Matthew Vincent to speculate that perhaps SJP were asking Woodford to do the wrong job.
Fund analyst Brian Dennehy points out that, in the last month, WEIF was down 8.10 per cent but the supposedly more liquid blue-chip SJP UK High Income was down 8.83 per cent. As a result, the return for SJP clients has been -3.16 per cent since July 2014, while for WEIF investors it has been -1.42 per cent.
The FCA clearly want to look deeper into this and they are right to do so. We need to have confidence not just in the managers, but in those who employ them. What is clear from learning about SJP , is that it is they, not their advisers or their clients – who call the shots. If Woodford only managed to his mandate, the buck stops with the FCA,