14 August 2019
By Jim Roberts, Chairman Verbatim Investment Committee
The biggest investment story of the second quarter of 2019 is one of failure. Once again investors have been dealt a blow by a small group of individuals operating in the financial services industry who have forgotten the fundamental function of their profession. Customer service.
Much has been written about the Woodford Equity Income Fund following its suspension on 1st June. Inevitably, this 'gating' of investors, which was extended on the 1st July - there is now a commitment to a formal review at least every 28 days - has significant implications. They grow more ominous for investors, and more far-reaching in terms of reputational damage to the industry, the longer this scandal continues.
The investing public has a right to expect that those people, to whom it pays a fee to perform a service, do just that. They entrust their money to a fund manager, and they have a right to appropriate regulation, operation and monitoring of all activities involved in the management of their investments.
The Fund Manager is obliged to operate within the constraints of the fund brief and in accordance with the publicised objectives of the fund. But who actually ensures that these are adhered to? Simply staying within the technical boundaries of a fund’s prospectus is seldom good enough. It is usual for these to be drafted to provide the funds’ operators with maximum flexibility, and specifically to avoid the scope for legal liability in the event of inadvertent, or even deliberate, breaches. In essence, the publicised objectives protect the fund provider, not the investor. Meanwhile, the manager's objective is to seek to maximise its income stream by increasing the size of the fund, which sometimes, but not always, involves generating performance.
The role of the Compliance Officer is of course to ensure compliance with the law and regulation, and also with professional standards and accepted business practices. However, the penalties for reporting, or even constraining the freedom of 'the management' can be severe, even career-threatening. Whistle-blowers have found that their integrity has made them unemployable. Meanwhile the fund providers’ Non-Executive Directors are there to provide independent oversight and constructive challenge to the executive. But how often does this occur when NEDs may be appointed, or at least nominated, by the executives themselves? Challenging one's 'employer' is seldom encouraged and may threaten a cosy sinecure. Auditors too, have a fee-stream to protect.
And then there are the Regulators of whom the public expects not box-ticking but another level of oversight. These are the experts. How can they fail to notice industry practitioners' exploitation of loopholes? Yet the regulator's reaction to the Woodford fund suspension has been to observe that it is a sensible solution to ensuring ‘fair’ treatment for the remaining investors. Where is their concern in the reasons for the havoc? And do they not have a care for the distress caused investors whose access to cash is denied?
In short, who represents the best interests of fund investors when conflicts of interest abound?
At Verbatim, things are different. The Verbatim Independent Investment Committee specifically exists to protect the interests of Verbatim’s customers. The Committee's processes are rigorous, disciplined and wholly objective. It approves Strategic Asset Allocations, the selection of the managers and the administrators; it oversees the governance, research and the investments themselves. Its sole focus is to provide these services.
Now that is customer service!
The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.