“Is the fund industry morally bankrupt?”

hospital 2

Waiting for you number to come up

It is 80 years since the United States set down the Investment Act that established four principles on which fund governance sits.

Fund governance refers to a system of checks and balances and work performed by the governing body (board) of an investment fund to ensure that the fund is operated in the best interests of the fund and its investors.

The objective of fund governance is to uphold the regulatory principles commonly known as the four pillars of investor protection . The final  principle states that the investment fund

“will be managed for the benefit of the fund’s shareholders and not its service providers”.

How can we justify fund manager rents?

Yesterday I sat with 84 others in Guy’s hospital for an appointment that did not happen. The NHS is overstretched , underfunded and under-performing. For the second consecutive quarter I would not be seen, nor many like me.

While standing in the waiting room (there were hardly chairs enough for those who could not stand), I spoke with Lucy White of the Daily Mail who wanted to know my views on the £13.8m extracted by Neil Woodford and his partner or the £84m shipped out to Mauritius by Terry Smith.

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Let’s be clear, these gents are talented and have got to the positions where they can get paid so much, because they have earned the trust of their investors

Smith Train and Woodford did not set out to break any of the principles of fund governance, but they have ended up  putting their interests first.

The rents they are extracting from their funds cannot be justified to their investors.

As I sat miserably with  84 people  in an NHS outpatients facility, I could not justify these monies ending up being taxed in Mauritius,

Which is why I gave this verdict on the  Investment Association’s Mr Cummings for defending the indefensible.

‘The last study of asset managers’ profit margins by the regulator showed they were taking 36pc. That’s ridiculously high.

‘Whenever I walk through the City, I see people staggering out of posh restaurants after entertaining each other.

‘It’s the way it’s always been, but the Investment Association expects us to be happy because it’s getting a bit cheaper to invest? It’s not good enough that Cummings keeps endorsing this behaviour.’

You may call that jibe about “posh restaurants” exaggerated, maybe it was the site of the misery  I saw around me that excited me, but this is a metaphor for how ordinary people see what Mr Cummings Investment Association condones.

Here is the Investment Associations  statement to  Lucy White

 ‘Fund charges and costs are more transparent than ever, and the industry is doing further work to ensure information is clear and understandable.

‘Fees are falling and it’s never been cheaper to be a fund investor. This is a positive trend we expect to continue.’

These words rung hollow to me yesterday afternoon. I could better relate to Alan Miller’s assessment;

‘The Investment Association is no more than a self-serving, intellectually and morally bankrupt mouthpiece for the industry.

‘It has resolutely tried to defend the indefensible and is completely devoid of principles, ethics or integrity.

This is not the politics of envy but a statement on ESG

The principles of the 1940 Investment Act stand good, on them has been built a framework of governance which we know as ESG. The “G” includes ensuring that the management of the companies invested in do not extract undue sums at the expense of shareholders and the “S” stands for their behaving in a way that improves society.

Shipping your money off to Mauritius Mr Smith, avoid your paying the UK taxes where your money was earned. It sends a solicitous message to companies who do not pay their UK taxes but shelter profits in similar exotic destinations. How can you look the management of those companies in the face and tell them to exercise ESG, when you aren’t?

Smith, Train and Woodford have been the doyens of not just the fund industry, but of all who advise on funds. I have praised Terry Smith on this blog and I have huge admiration for the way he runs his funds, but I’m no fan of a 1% AMC if it results in £84m being packed off to Mauritius. What kind of an example is that?

All the work that Share Action, Pirc and Minerva- Manifest do to clean up our boardrooms is unravelled by these men.

Every other manager in the City will look at those numbers and justify their high bonuses against them, so will the army of advisers, brokers, custodians, lawyers, accountants and marketeers who feed at their table.

Money will continue to be shipped out to Cayman, Mauritius or even the Channel Isles and our public services will be the poorer for it.

The lessons of the Asset Management Market Study are yet to be learned

The FCA’s asset management market study presented evidence of weak price competition in many areas of the asset management industry. This means lower returns for savers, pensioners and other investors.

Although it led to a referral to the Competition and Markets Authority, it did not lead to a change in culture among fund managers and evidence of this is the exorbitant amounts paid to Woodford and his business partner. So incompetent was Mr Cummings in defending them that he actually claimed they were being paid so much for their outperformance! The payment of £13.8 m was paid to them as their fund crashed into oblivion! Lower returns for savers, pensioners and other investors indeed.

The terms of reference for the FCA’s market study were published in 2015, the report was published in 2017 and these bonsues were paid  between 2017 and 2019.

The remedies the FCA put in place in 2017 were

  • measures to give protection to investors who are less able to find better value
  • measures to drive competitive pressure on asset managers
  • proposals to improve the effectiveness of intermediaries

It is possible for investors to avoid the high rents of those who run active funds so they can get better value, it is possible to find managers who have responded to pressure and you can find intermediaries who will be effective in getting you to the right place.

But three years after the Asset Management Market Study, there is still nothing to stop fund managers taking ridiculous sums for the management of our money and nothing stopping them shipping it off to Mauritius,

Nothing that is , but the outrage of Lucy White  and her readers. If the FCA cannot rid us of these bad practices, if intermediaries condone and replicate them , then it is up to investors and the press to name and shame them. That is not an ideal means of change, but it seems it is all we are left with.

I would like that money back in the UK and properly taxed.  That tax should ensure that people who sit in NHS outpatient departments have doctors to see them. I would like the managers of our money to look the managers of our investments in the eye and tell them not to over pay themselves and to pay their and their company’s taxes – properly.


There are not enough doctors for patients

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in advice gap, age wage, pensions and tagged , , , , , . Bookmark the permalink.

3 Responses to “Is the fund industry morally bankrupt?”

  1. Eugen N says:

    I am trying to understand what exactly your message is. Is there a direct link between how much investment managers charge and the quality of service in the NHS? There is no direct link!

    Investment management charges would not go down easily, especially for funds where the investor believes based on past performance and based on the way the investment manager picks stocks that the fund will outperform in the future. Just 10% of the funds outperform, I think that we should focus on the other 90% first!

    With regards to paying tax in the UK, these people are playing by the rules. If you are non-UK resident, you do not pay UK income tax in this country. You are a Conservative member, why you do not contact the Chancellor and ask him to change the tax law? For example to tax people like in the United States, based on citizenship?

    For the NHS – we all need to pay more tax, especially the UK residents, the ones that we use the NHS. I have no problem with paying more tax.

    • henry tapper says:

      And these people don’t live in the UK? We are bound by a code we call ESG. That means behaving in a way that is Social – and promotes good Governance. It means practicing what you preach. And if we all do that- everyone gets better returns

  2. julierichardswbacom says:

    i think the message is crystal clear – whilst things may be within the letter of the law, there is questionable ethics around behaviour – Woodford and Newman and the best example (i am sure they knew the shock was coming when they took their money).

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