A bit more like an investor’s champion and less like a bloated fat cat, says Daniel Godfrey – who had to leave the fund trade body he headed for saying so…
Of all the categories of companies listed in the UK, which is the most profitable? The answer, according to Numis Securities, is fund management. With net margins of well over 30%, it’s beating pretty much every other sector hands down. And that’s after paying its employees some of the highest salaries in the UK. That’s nice. It’s also something that the industry is keen to see continue: super-profits are hard to give up once you’re used to them.
The problem? The traditional fund-management industry has yet to be properly disrupted – but plenty of folk have it in their sights. There is dramatic price competition under way in the form of exchange-traded funds (ETFs). Indeed, 43 new companies entered the ETF market last year and there are now 275 providers globally, says the Financial Times. Investors have been pulling cash out of big-name funds in the wake of poor performance: in Europe, M&G and Aberdeen both lost $16bn-worth of assets last year. The internet is awash with new robo-advisers offering ready-made passive portfolios on the cheap. And the Financial Conduct Authority (FCA) is (finally) getting twitchy about opaque fee structures. It has announced a review into costs and competition in the sector with a view to establishing whether investors get value for money or not (I can answer this in one word by the way, should anyone in the FCA be reading and want to get the review over with quickly).
A tricky path to tread
All this means that if the nation’s top fund managers are going to hang on to their multimillion-pound compensation packages (you can only pay super-salaries if you make super-profits), they’ve got some work to do. They have to figure out how to look as though they are reforming (cutting costs, caring about investor returns, etc) without actually reforming enough to cut their marvellous margins. It’s a tricky path to tread. Three years ago, the investment industry clearly thought that part of the answer was to hire someone with strong public views on how consumers should be treated and to pay him a great deal of money to run their trade body – the Investment Association (IA) – and somehow find a way to keep both investors and managers happy.
So they hired Daniel Godfrey. It didn’t work out – £533,000 a year is the kind of money you pay someone when you expect them to agree with you and Godfrey turned out not to agree with a good many IA members. The result? When he came to the MoneyWeek offices for an interview just before Christmas, he came as the former chief executive of the IA.
What went wrong? He starts out tactfully. “A small number of quite large members took the view that they weren’t happy with the direction of travel of the association, and made it clear that they intended to leave. And in a trade association, really your strength comes from the unity of the membership.
So clearly, even if it’s a small percentage by number, and even a relatively small percentage by total value of the assets managed, it gives you a real and immediate problem, because you need to speak with a single unified voice. And I felt, having considered it, that it was in the interests of the association for me to leave.”
Right. So what was so wrong with the direction of travel? Godfrey’s plan during his time at the IA had been, he says, to “make investment better”. What sort of better, I ask – more profitable for fund-management firms, or offering better outcomes for consumers? Godfrey responds to that in a slightly IA-ish manner too (he is still using the word “we” when he talks about the fund-management industry). There is, he says, “no tension between the two”. Good fund managers should work as the agent of the client (his “champion”) – pushing for companies to be and to do better, and keeping costs down by preventing savings being nabbed by intermediaries. That in turn should be good for the economy, which is financially good for everyone and feeds into the long-term commercial success of the industry.
I’m not totally convinced. The fund-management industry has done remarkably well over the last few decades without showing much sign of giving a damn about either the sustainability of the corporate world, or the long-term wellbeing of its ordinary clients. Pushing for “better” might be nice, but nice has historically buttered little bread in fund-manager land. “I can see why you might say that,” says Godfrey. But disruption, competition and “regulatory focus” really are making a new environment. The same is true of people’s investment timeframes. Rising longevity and pensions freedom mean we all need to invest for the long term. That means “the environmental footprint of the company, the way they treat their employees, the reputation… they have in their local communities, and the pay of the chief executive” is relevant. None of those things matter if you are just “trading in stocks”, but if you are actually “investing in companies” with a view to creating long-term wealth, they do. So the way fund managers interact with companies to change these things for the better matters too.
What riled the refuseniks?
Godfrey might be right on all this – and his views will chime with many of the things you have read from us over the last decade. The problem, of course, is that they don’t always chime with the industry. One thing that Godfrey tried to do at the IA was to get its members to sign up to a statement of principles – a list of good things they intended to do within their businesses. These seemed pretty innocuous to most people (see below). But not very many members were prepared to sign (those representing only about 30% of the member assets under management eventually did). I have some sympathy with the refuseniks, on the basis that most of this stuff is in guidelines or regulations somewhere already, so you could say it just adds another layer of super-boring semi-compliance on top of the horribly huge mountain of the stuff financial firms already have to put up with. That’s particularly the case given that Godfrey insisted that anyone who signed also had to explain on their website how they intended to implement the feel-good statements within their businesses and (worse, from an administration point of view) a year later make another statement “saying that their approach to implementing the principles is working, or identifying any issues they’ve identified and how they’ve dealt with them”. Boring, boring, boring.
Maybe so, says Godfrey. But actually, given how seemingly innocuous the principles are, it really shouldn’t be hard for anyone running even a faintly respectable business to jump through the hoops. “Had I been running a firm, I’d have been in the camp which said, well, let’s sign up to this, let’s tell people how we do it, and let’s get on with it. If we’ve identified that we’re not doing something here, well we jolly well should be.”
We are both bored of the IA at this point – Godfrey has stopped using the word “we” and started talking the language of consumers (the one that lost him his job…) and I’m just feeling irritated with Schroders and M&G (the two big firms that threatened to leave the IA if Godfrey didn’t beat them to it). So we move on.
We need to see conviction
What, I ask, does the perfect fund manager look like to Godfrey? For his own money, it is one with conviction. He wants to see managers investing in a smallish number of companies (say, 20-25) with a view to staying invested for long periods of time. He would prefer a small fund over a large one, and wants to see a high “active share” (holdings that don’t reflect those in any given index).
How about fund fees? Does he approve of managers charging a performance fees? Not really. There’s no reason why “a performance fee makes someone come in to work and do a better job every day”. But he can also see that from “a
consumer’s perspective, it certainly feels a lot better if the fund manager only makes an awful lot of money when they’ve made you an awful lot of money”. So as long as the final fee isn’t too high and the whole thing is transparent, he is “quite open minded to different models” – he is interested, for example, in the Neil Woodford model of just charging a fee to cover expenses and only taking enough to make a profit when the fund outperforms. He also agrees with me that a tiered model (one in which the fee falls as the fund grows in percentage terms) is fair. Right now, says Godfrey – with some understatement – “the industry’s not great at sharing the benefits of economies of scale with the customer”.
Rich people in glass houses
That leads me neatly on to fund managers’ pay. The industry is remarkably well remunerated, something that surely makes it hard for managers to intervene when it comes to the pay of the senior management of the companies in which they invest. We know that the fact that a CEO can make an amount of money that can change the lives of his family for generations to come isn’t particularly good for shareholders. But if a manager is raking in a few million a year himself, it’s a bit “glasshouses” for him to have a go at the CEO in question. Perhaps, says Godfrey. But actually this is another area where there is pressure. Pay has not only gone up hugely in the last decade, but it has also become incredibly complex and hard to follow. From the point of view of shareholders, that represents an “epic fail”. So what we need to do is move first towards much simpler pay structures – something that should in time bring the final numbers down.
This, says Godfrey, has to happen. Executive pay is “damaging the reputation of business and fund management with society”. It can keep going, but without change “eventually, people will be marching down the street with pitch forks and burning torches”.
But Godfrey still reckons the fund-management industry could do something about executive pay – they have a report on the matter coming out in the spring. I wonder. I have a feeling that the fund-management industry won’t be too fussed about executive pay until it is more bothered about fund-management pay. When the latter comes down (as all the pressures we have discussed kick in), then so too might the former. Something for us all to look forward to.
Who is Daniel Godfrey?
Daniel Godfrey, 55, graduated from Manchester University with a BA in economics and politics. His City career includes 11 years as director-general of the Association of Investment Companies (the investment-trust trade body) and a stint as chairman of the Personal Finance Education Group. In 2012 he was hired as CEO of the asset management trade body, the Investment Management Association (now the Investment Association, or IA).
Godfrey, as the FT puts it, pursued a “reformist and consumer-led agenda”, with the goal of restoring trust in financial services. But his efforts to get asset managers to sign up to a ten-point statement of principles aimed at helping the industry put customers first proved divisive.
The statement included commitments such as: “Only develop, offer and maintain funds and services designed to add value for clients and help them achieve their financial goals”; and “Make all costs and charges transparent and understandable”.
The refuseniks argued that this made the IA more like a regulator than a trade body. Large members, including M&G and Schroders, threatened to quit. Instead, Godfrey did, in October last year. M&G and Schroders have since renewed their memberships.