What does SJP “sacking” Woodford mean?

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.

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.

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.

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

  1. Companies become wary of being quoted of the publicity
  2. Managers become wary of transparency
  3. 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

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)

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,


SJP.jpeg

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in FCA, governance, pensions and tagged , , , , , , , . Bookmark the permalink.

10 Responses to What does SJP “sacking” Woodford mean?

  1. con keating says:

    The replacement manager in these situations matters. There is a tendency for those charged with delivering ongoing performance to ‘kitchen sink’ the existing problems. It is a phenomenon we often see in companies with new FDs appointed. It is often better to appoint some form of transition manager with a mandate to maximise the recovery process. I do not know what the situation in point is.

  2. Phil Castle says:

    Having read various other articcles on this and despite not being a fan or defender of SJP, I think your article has missed an important point bout the SJP fund mandate in that from what I have read, SJP didn’t allow Mr Woodford to invest in the illiquid assets causing the problem for his own fund and limited holdings to FTSE only.
    As such the replacement of him as their mandated manager was more about them maming sure they ditn’t lose face/credability due to the gating.
    Hope that helps.

    • henry tapper says:

      If it was all about SJP’s reputation, I’d be worried. This is about other people’s money.

      SJP dumping on Neil Woodford forgets that this was an 18 year old relationship. – Was the mandate wrong or was Woodford wrong for the mandate

  3. Jim Parsons says:

    Henry, having followed the stock market for many years, from you article I would conclude that the FCA should ban short-selling, for this appears to be the problem. GREED. As a small investor, retired, I am invested to provide income. Good companies appear to be driven to the wall by greedy, unscrupulous, (already rich) investors who see an even bigger profit by breaking up a company; destroying it and putting 100s if not 1000s out of work and leaving people like me with worthless share certificates, which once produced a reasonable income..

    • Doug Brodie says:

      You have a very reliable and uneventful soltuion as a retired income investor in investment trusts. You should use them.

      If you choose, alternatively, to try your hand at stockpicking then bonne chance. If you have been caught in Woodford Eq Inc then look at the historical 4.4% yield, as that is the income you presumably seek. If he has lost the illiquid and so ‘non income’ assets then the income distribution should not be affected, and you may well find the quoted yield jumps.

      For an income investor, the capital value is only relevant if more than natural income is taken. To remove the risk, stick to natural income hence use investment trusts – they have significant reserves to support the income payments when/if needed.

  4. Robert Davies says:

    Surely this is just a reminder that picking active managers is akin to voodoo witchcraft.

    Unless a manager has a written rules-based investment process you are just selecting somebody who you think can discern the future better than anyone else and do it consistently for decades.

    • Jim Parsons says:

      Is that not what he has done?

      • Doug Brodie says:

        Don’t misread US research as applicable to the UK. Lots of managers beat the index in the UK, its just the S&P that creates problems.

        (Most probably due to the (lack of) diveristy in sector mixes of the respectives indices).

  5. Doug Brodie says:

    Because we know who Peter Young is.

    It’s also imperative that we allow investments to be unpredictable – otherwise we end up with cash. Risk isn’t evident without evidence, and so we need items like this. Though the risk here is not that the assets have gone pop, the risk here is that the manager got the investor cashflows wrong. Like SJP, all the institutional money should be in managed accounts not the funds.

    This is precisely where AIG got its UK cash funds wrong in 2008, similarly allowing insititutional withdrawals to exceed liquidity and stuffing retail investors who were in the same funds – as we have here.

    The transparency is only an issue with his minor, illiquid items – anyone wanting to short Glaxo doesn’t need to see Woodford’s allocation. And it is the unquoted stuff that stuffed him as that is not what made him famous – Antony Bolton take a bow. History repeats…

    Due diligence on W was simple, and was ignored, and one wonders what Kent CC asked about his split from Invesco. The lack of honest explanation of that event and the FCA fine should have been enough to keep people very sceptical.

    Industry insiders, the old lags who have grown up with the funds, the funds houses and the managers, know where much of the dirty laundry is/was. Nick Train (perhaps he has a brother called Neil) owned 11% in HL.

    I asked him why and didn’t get a forthright or clear, elevator pitch type answer. He only looked at the aging demographic business model justification, he clearly underestimated (if at all) the internal detail risks that perhaps only insiders recognise.

    Why only insiders? Because we know who Peter Young is.

    Neil Woodford, after 2000, put £10m of client money into a listed IFA firm called Inter Alliance – I called him to ask why as I was mystified, and – frankly – he waffled, and didn’t know. It was clear that it was a matched trade alongside Goldman Sachs and he knew nothing of the detail.

    That was £10,000,000.

    There are many on the periphery who think that the old investing game, retail client investing, must be simple, how hard can it be. HL’ s stated business strategy was to flog stuff, and keep inside the regulator’s line of acceptability. They are brilliant at it, and there’s been decades of smoke and mirrors to get there (skimming client accounts – comment please Henry).

    But – if the operator of a SIPP is now deemed to have fiduciary responsibility for the assets an investor self-selects, then I can’t see how the promotion of a pre-selected range of funds does not land HL with exactly the same liability.

    Perhaps this is what we need to re-introduce caveat emptor.

  6. henry tapper says:

    I think that comment is rather better than my original post – thanks Doug

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