7th March 2013
There have been two big stories this week involving how fund managers relate to the companies they invest in. One is – mostly – irrelevant to you, the end investor, though it is all rather unpleasant and merits action from regulators. The second is hugely significant for end investors.
The first story involves the rather bizarre news that some fund managers – mostly hedge fund managers by reports – have been paying large sums of money for one to one access to chief executives – arrangements sorted out by certain investment banks.
The financial watchdog, the Financial Services Authority, is not amused that sums of up to £12,000 are being paid for face to face meetings as the Guardian reports. The total bills to fund managers come to millions and it doesn’t sound like money well spend.
The second story involves one of Britain’s best fund managers Invesco Perpetual’s Neil Woodford. He has been urging his peers to take much more of an interest in the strategy of the companies they place your money with, as reported on Citywire this week.
Now Mr Woodford famously makes sure he gets face time or at least telephone time with many chief executives, most recently BAE Systems, but we are also sure he never has to pay anyone – let alone an investment bank – for the privilege. The money that does the talking in his case is the money he has to invest.
But we think the two stories sums up the strange world of investment today. Have the hedge funds paid the money in order – somehow – to steal a march on rivals? Or is it simply that the culture of investment banks to charge for anything that moves and their clients haven’t thought to question it?
They have run into financial regulations that don’t let fund managers pay for these meetings and there is talk the FSA could even fine some of those involved, which is obviously a good thing. However we don’t think the short termist part of the market is really a concern for any serious long term investor though they may things a little more volatile for everyone else which is a headache.
The medium to long term investor should however be concerned that many fund managers and institutional investors which could include your pension fund are not taking an active interest in the firms in which they invest.
Neil Woodford may not be alone but he certainly shouldn’t be in a minority. The broad issue is that better engagement would probably be better for the UK economy and certainly the stock market listed sector of it. But what should be of concern to you as an investor is that it might mean that company boards are held to account for poor performance. That could eventually mean you get better returns. Mr Woodford appears to be a case in point given his record.
It’s odd because these two stories illustrate two issues in fund management – the first an almost unhealthy interest in companies from short term investment firms, the second an unhealthy lack of interest from some long term investment firms. The second is much more important for you.
But we’ll let Mr Woodford sum up with this quote.
“What we need to do as an industry is think more long-term about our investment; the failure of the industry is a product of excessive short-termism – it exists at every link of the chain. We need to tackle short-term culture at each segment. Fund managers need to recognise their ownership responsibilities more readily.” Mindful Money couldn’t agree more.