Neil Woodford can afford the smartest spin doctors, and it shows. Hardly a day goes by without a Woodford story (almost invariably positive) in the media. The latest success for his PR machine came this weekend, with the announcement that the Woodford Equity Income fund will now absorb its own research costs, rather than charging them to investors.
This is, of course, good news for investors, and let us hope that other fund managers will follow Woodford’s lead. But it needs to be kept in context. That Woodford Investment Management, along with almost every other UK fund management company, was asking investors to pay its research bill in the first place is a scandal.
To quote WIM Chief Executive Craig Newman, “Research costs are a function of our role and we believe it is only right that Woodford, not our investors, pay for it”. Indeed so. Why only now, then, has it decided to make this grand gesture? To anyone who’s been following developments in UK asset management, the answer is glaringly obvious.
Commentators like myself and the True and Fair Campaign have questioned why investors have been paying for research for years, but it took the ousting of the former head of the Investment Association to bring it home quite how farcical and grossly unfair the situation is.
During his time at the IA, Daniel Godfrey campaigned, largely unsuccessfully, for greater transparency over fees and charges. Now unmuzzled, he writes for the FT. In a recent, strongly worded article for that publication, Godfrey explained that investment research, for which investors were charged a staggering £1.5 billion in 2012, is largely “valueless”, and that “even some of the research providers will admit that 90% of it is never read by anybody”.
So why have investors had to foot the bill? The reason, simply, is that fund management companies have been allowed get away with bundling the cost of research together with execution costs.
Only recently have regulators begun to put pressure on the industry to unbundle these two very different types of expense. Industry bodies, including the Investment Association, have successfully lobbied the European Commission, on the issue. The Commission announced in December that it was going back on plans to include unbundling in MiFID II, its latest attempt at regulation. But Britain’s Financial Conduct Authority is known to be taking a tougher stance.
It may well be that WIM is expecting the issue of research costs to feature in the FCA’s interim report, due in the summer, on its market study into competition in asset management. Jumping now, before it’s pushed, has given it a PR coup, making WIM appear a consumer champion by volunteering to pay for an expense it will probably have to shell out for anyway within the next two years.
Yet even if active managers do start paying for research, there will still be a raft of additional expenses that investors will have to meet themselves, including transaction costs, broker commissions, bid-offer spread and stamp duty. Until they are given a single figure, in pounds and pence, for the cost of investing, it remains extremely difficult for consumers to make a considered judgment on whether they are getting value from their fund manager or not.
If you enjoyed this article or found it helpful, why not sign up to my email newsletter The Weekly Update?