Striking out

Events in Oxford evidently haven't put off other fund managers from going it alone: on the day Woodford Equity Income’s suspension was extended indefinitely, two others announced intentions to plough their own furrows in future.

News of Fidelity multi-asset boss James Bateman’s departure was swiftly followed by word of Alexander Darwall’s planned exit from Jupiter. The latter decision might just pose a challenge to fund selectors as they weigh up the lessons of the Woodford affair. 

Mr Darwall’s departure may hasten holders of his open-ended fund towards the investment trust likely to follow the manager to his new venture. And porting over a £1bn strategy will bring obvious advantages for a new business; scale won't be an issue. 

Like Mr Woodford, Mr Darwall is no stranger to controversial holdings: 15 per cent of the trust’s assets are in Wirecard. But there are advantages for buyers: the closed-ended structure should guard against liquidity issues, and the trust's board will presumably seek to renegotiate its hefty performance fee as part of reassigning the management contract. 

So there are grounds for optimism over the new boutique’s prospects. Yet these reasons to be cheerful might encourage selectors to make a decision that ultimately proves too hasty.

While a new business can outsource plenty of ancillary services, the most important - the quality of its risk controls - often boil down to how seriously they’re taken by a newly liberated fund manager. Assessing that balance takes time.

Fund buyers may well be inclined to take another leap of faith instead: some will be reluctant to sell the trust if it’s likely to mean buying back at a larger premium at a later date. The lessons of the past month suggest that taking a step back, whatever the disadvantages, will be the more prudent option.

Starting early

More than one tension is at the heart of the issues thrown up by Woodford IM’s fall from grace. The liquidity mismatches are the most obvious, but there's also a growing conflict at the heart of the investment world as a whole.

It relates to the shrinking of the stock market as a whole: in the US, where the trend is most evident, the number of listed companies has halved since 1996. Cheap money means companies have a reduced need for other sources of financing, and listing a company is increasingly being treated as an exit mechanism for founders rather than a growth opportunity.

That's naturally led to investors looking to get in earlier, as the pile of money currently sitting on private equity funds’ books indicates. Not everyone has such flexibility, of course. The now-infamous Ucits 10 per cent rule means open-ended fund managers are - usually - constrained from going after these opportunities. 

Investment trusts can do so more readily, but the retail investment industry retains a structural preference for Oeics and unit trusts that isn’t going away any time soon. 

There's also a related issue over whether or not retail investors should effectively be left behind as others ramp up their pursuit of these opportunities. In 2017, an industry panel responding to the government’s Patient Capital Review said they should be given more opportunities to “share in wealth generation by UK scale-up…businesses”. The Treasury’s October 2018 update prudently side-stepped that call, focusing instead on permitting DC pension schemes to back such firms.

The UK’s own start-up culture, as the government acknowledges, doesn’t yet compare with those found elsewhere. Still, it’s hard to escape the nagging thought that the UK retail investment industry is ill-equipped to adapt to a new era of investment. Chasing better returns should never come at the expense of protecting retail investors, but some hard thinking needs to be done to address this growing mismatch in incentives.

Another mismatch

When it comes to listed companies, the “flowless recovery" continues apace. With equity markets rising, again led by the US, few in the DFM community or elsewhere have clamoured to pile on risk.

That might be a legacy of Q4’s sell-off, but there are other reasons to exercise caution. For one, the upward trajectory of US equity valuations is not matching up to (some) fundamentals.

As the FT notes today, the S&P 500 is trading at more than 17 times’ analyst estimates for earnings over the next 12 months. FactSet data shows that analysts expect corporate earnings to slip, year on year, in both the second and third quarter. 

For DFMs it’s a reminder that continuing to take profits at the margin, and being aware of exactly how their US equity picks are positioned, remains a sensible move.