The Woodford saga from the summer of 2019 raised some important questions for the asset management industry for all players, large and small. When a fund implodes, as Woodford’s UK Equity Income Fund did in this instance, who’s to blame? The fund manager you’d assume but with the investigation ongoing (the incident was brought up in the UK Parliament suggesting its importance) there’s perhaps more to this tale than one man’s error of judgement.
Firstly, what is governance. Shiv Taneja, chief executive of Funds Board Council says eloquently, “In today’s world of investment management, being complaint with the rules are just table stakes. Regulation may determine the weather, but fund managers and their boards are now answerable to a range of other ‘stakeholders’, not least of investors in the significantly more ESG-aware world we now live in.’
Here’s where it gets a tad tricky. Firms can outsource their governance to an outside party, an independent authorised corporate director (ACD). In Woodford’s case this was Link.
However, many firms outsource this function especially in the boutique space, where having a fulltime middle office is costly. They can also be extremely useful.
Joe Bunting, founder, co-chief investment and managing partner of boutique firm Tellson’s Investors says: “They [AFDs] can bring great operating efficiency, leverage, technology, service standards and pricing benefits alongside true independence too, just like the custodians and depositories, specialists with scale reliability.”
The formation of ACDs goes back a long way and Mr Taneja explains that rather than outsource governance to a ‘couple of individuals’ who might ‘wander off’ if times get tough, creating a legal corporate entity in the form of an ACD makes sure that there’s always somebody responsible.
Given that ACDs are mostly a UK model, with differing variations on the theme in the US and Europe (with the latter employing ManCos and FundCos for instance), there are a number of issues to be considered when looking at this part of the asset management industry.
“You've got to be quite clear what the entity is that you're looking at and know why is it set up in the manner that it is? What is the relationship that it has between the investment manager and the investor?” says Mr Taneja.
Little known fact
The relationship between the authorised fund manager (AFM) and the ACD gets more complicated when the role of depository is introduced.
The depositary has an important role in investor protection and is responsible for the safekeeping of the fund's assets.
When an AFM outsources its governance to an independent ACD, it becomes the customer of the ACD as its purchasing a service from them.
It is a little-known fact is that the depository is actually there to supervise the ACD, it is tasked with safeguarding the assets as mentioned.
However, the depository also has a commercial relationship with the ACD though so perhaps this complex relationship explains why the FCA conducted a market review which happened to coincide with the Woodford situation.
There’s another player in the mix as well, which in the case of Woodford was Hargreaves Lansdown, with references in the media to the relationship being described as akin to a ‘star’, in this case Neil Woodford, having an ‘agent’, Hargreaves Lansdown.
Given that the FCA investigation into the Woodford fund drama is ongoing, it would be unwise (and a tad risky!) to allocate blame at this stage although it did raise some interesting issues.
All about the money
Mr Taneja recalls his 30 years of asset management industry experience and talks of a time when there seemed to be no barrier to entry into the market. If someone had a good idea and wanted to manage money but that alone, it was possible.
“You can actually unpack the fund management business and there will be an outsourced solution for pretty much every component of it,” says Mr Taneja and with the growth of asset management service providers, it seems that it may still be possible to focus on your money managing skill and outsource the rest.
The ACD market has grown more competitive and perhaps for some wanting business, they may be simply engaged in a race to the bottom in terms of fees to secure clients.
The FCA’s response looks to be one of quality control, to ensure that if a firm outsources its governance to an independent ACD, the business has to employ enough people to make sure the crucial role is carried out correctly. This would presumably make the cost of outsourcing the function more expensive.
Asked whether this may lead to more firms bringing the processes in-house, Mr Taneja says he sees a continued role for well-managed and strongly capiltaised independent ACDs. And it’s not all about money, some fund managers ‘just genuinely don't want to get involved in that aspect of the business’ he says.
This is certainly the case for up-and-coming UK-based boutique manager Havelock. The firm’s co-founder and chief executive Matthew Beddall tells Fundtruffle: “Using an independent ACD allows us to focus on investing and give customers an independent steward overseeing their interests.
“Attempting to run an ACD in-house would just not be viable for a boutique firm and would weaken the checks and balances on us. Neither model is perfect, but when correctly executed it makes a lot of sense.”
In essence it boils down to two things, money and secondly who has oversight over who?
Funds Board Council was created out of the need for a much greater understanding of the heightened regulatory environment around governance on fund boards in the UK in 2018 and 19.
The body provides consultation on governance, advice on how to manage in this heightened regulatory environment as well as offering training to fund board directors.
With a diverse team ranging from the likes of recent appointment Simon Hynes, who has held board positions at the likes of Jupiter and Legal & General Investment Management to asset management publishing mogul Alan Chalmers, its little wonder that its clients include some of the industry's titans such as Franklin Templeton and Invesco to name but two of many.