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The Woodford case: When nervous investors sit on illiquid investments

The impending collapse of the Woodford Equity Income Fund (WEIF) in the UK may not only cost (ex-)star fund manager Neil Woodford his company. The crisis also casts a shadow over the increasingly popular illiquid investments, especially among institutional investors, and their supervision.

The case of Neil Woodford, who is currently holding British investors, the media and financial regulators in suspense, can be told from three perspectives: as a drama of the rise and fall of a former star fund manager, as evidence of the carelessness of supervisors, or as a harbinger of the difficulties of active asset managers when they juggle illiquid investments. Above all, however, it is a warning of how reluctantly the key players in the affair communicate.

So, what happened?

Neil Woodford, who after 26 years at Invesco became self-employed in2014 with his company Woodford Investment Management, was popular with investors. Both the large institutional investors such as St. James’s Place and Kent County Council pension fund, but also with many small investors who were busy investing in his flagship fund, the Woodford Equity Income Fund (WEIF), through the leading UK retail fund platform Hargreaves Lansdown.

“His approach, based on bespoke research, gut feeling and a taste for going against the grain, divided opinion,” writes The Economist about Woodford. But the investors in the United Kingdom trusted him: within a short time, Woodford managed to raise the WEIF to a volume of around GBP 10 billion. Around 1.6 billion of these were parked directly or indirectly with Hargreaves Lansdown clients at the end of March – and brought the fund platform a substantial profit margin.

Woodford’s style of investing in large, dividend paying corporations (Blue Chips) changed over time. The manager increasingly relied on the supposed winners of tomorrow: small, partly not even listed and illiquid companies with a focus on the British domestic market. But his risky bets didn’t work, his performance was mixed, and investors withdrew a lot of money from the WEIF.

At the beginning of June, the fund was down to GBP 3.7 billion and when Kent County Council was to withdraw its GBP 263 million mandate on 3 June, the WEIF was blocked from repayments. This freeze remains in place. Comments from Woodford’s firm suggest that it will be maintained for months until the fund has released enough cash to pay out impatient investors.

Market expectations are that investors will flee the WEIF in droves as soon as they are able to do so again. From Woodford’s second fund, the Woodford Income Focus Fund (WIFF), investors withdrew GBP 116 million within ten days by mid-June. Market observers are now publicly questioning whether Woodford’s firm will survive the loss of assets and confidence.

However, what was the downfall of Woodford’s, with his often-down-to-earth appearance, was not his poor performance, Financial Times columnist Merryn Somerset Webb says. Rather, it was a whole series of cardinal mistakes: “Mr. Woodford took too much money too fast. He believed his own hype, forgetting that the team around him at Invesco and particularly its risk management and compliance controls might have been helping him out. But, worst of all, he mixed and changed styles.”

Financial supervision embarrassed

Woodford’s crisis has now spread, embarrassing both Hargreaves Lansdown and the UK Financial Conduct Authority (FCA).

The Chief Executive  of the fund platform, Chris Hill, first had to publicly apologise for why Hargreaves had not earlier removed the WEIF – despite the persistently poor performance and doubts arising from its liquidity –  from his “Wealth 50” recommendation list. Two days later, Hargreaves waived the platform fees for the fund.

Another day later, Nicky Morgan, Chair of the UK Parliament’s Treasury Committee, said that investors should not pay any management fees at all for the WEIF, as long as it is blocked. And while Neil Woodford has so far refused to comply, Hargreaves Lansdown CEO Hill has taken personal action and said he would be waiving his GBP 2.1 million bonus.

„The actors in Woodford’s investment drama haven’t made any effort to quickly clarify and communicate.“

Morgan and Members of Parliament (for a change not immersed in trench warfare over Brexit) ask FCA the unpleasant question: “Did the supervision sleep at the wheel when the fund manager went into the crisis?” Meanwhile, Morgan has announced a parliamentary inquiry into fees and transparency of the entire fund industry. For FCA boss Andrew Bailey, the Woodford case could turn into a career snap: His candidacy to succeed Mark Carney as the Head of the Bank of England will be given little chance.

Whether Woodford, Hill or Bailey – the key players in this investment drama haven’t made any effort to quickly inform and communicate with investors.

Head of Bank of England warns against illiquid funds

It was Carney, by the way, who only recently again pointed out the dangers of illiquid funds: At a meeting in Tokyo, the Governor of the Bank of England warned against investment funds that promise their customers daily liquidity, but invest some of their capital in illiquid investments – around USD 30 trillion have already been invested in such funds, Carney said.

The Woodford case thus also casts a shadow over the liquidity of investments such as private debt or real assets, which are particularly popular among institutional investors in times of low interest rates.

Stable, predictable returns from long-term investments – who would say no to that? However, it becomes problematic if investors unexpectedly want to withdraw from these investments, but pay-outs are blocked … Just remember the crisis of open-ended real estate funds in Germany in 2008 and in Great Britain shortly after the Brexit vote in 2016.

In October last year, the FCA published a 79-page advisory paper on the risk of illiquid investments, which was updated in April. Michael Busack, editor of the German institutional magazine Absolute report, put it in a nutshell in the foreword to the current issue: “Nothing is more dangerous than an illiquid investment that has to be sold under pressure and possibly with the knowledge of other market participants”.

The quiet before the Brexit storm

Unease within the British investment industry is increasing: Facing the threat of a „No Deal“-scenario there are continuous speculations about the extent of (anticipated) asset outflows due to Brexit, which companies are going to leave and how many employees they will take with them. Since the referendum the media, investment managers and national trade associations have their finger on the industry’s pulse. They predict: Small investment boutiques without any European representation will be hit particularly hard.

Albeit a looming „No Deal“-Brexit, the German fund sector ‎demonstrates composure. According to a survey by the German asset management body (BVI), three quarters of German asset managers feel only slightly or not at all affected by an unorderly Brexit without a transition period. After all, portfolio manager from the United Kingdom only stand for 7 per cent of the assets in institutional funds and 3 per cent of the assets in German mutual funds.

Only days before the (so far‎) still official exit on 29th March 2019 the disquiet in the UK keeps increasing. This is partly attributable to the British perception of its own fund sector’s significance. According to The Investment Association their 240 members managed more than 7.7 trillion GBP assets for clients in the UK and 1.8 trillion GBP for European clients at the end of 2017. Overall that is equivalent to 35 per cent of the total assets in Europe.

But also does the finance industry fear that Brexit is going to entail an exodus of national and international asset managers of hitherto unknown dimensions. And that (according not only to the British media) would involve outflows of billions (in the hundreds) of client’s assets, the departure of dozens of investment managers and the loss of 10,000 jobs.

Two thirds of UK managers consider Brexit as a competitive disadvantage

It is a justified fear: In a regular survey of the CFA-Institute, the worldwide association of investment professionals, 68 per cent of all in the UK domiciled investment companies said in March 2018 that the Brexit vote has already damaged British competitiveness. So far asset managers as other financial institutes do, too, use the EU-Passporting which is at risk in case of a ‚no deal‘. At present, 244 British asset managers use this passporting in order to be able to offer their products in Europe without any barriers. 139 companies from EU member states use an „Inbound Passport“ for their distribution in the UK in return. That British participants in the financial market would really lose entry to the EU market in a ‚no deal‘ scenario has just recently been made unmistakably clear by the Head of the European securities regulator ESMA, Steven Maijoor, in Dublin.

67 per cent of British CFA members assume that they will reduce their presence in the UK because of Brexit. Of all the companies within the EU (except UK) even 76 per cent made the same assumption in that survey. As the biggest loser in a Brexit without a deal, 85 per cent consider it to be London as financial centre. As Brexit-winners on the other hand, Frankfurt, Paris, Dublin, Luxemburg and Amsterdam, are considered.

A relocation of financial service providers on a grand scale would have serious impacts on job markets of London, Edinburgh or Bristol. After all, 10 per cent of the roughly  94,000 employees in the financial sector come from Europe. So why then, with Brexit as the sword of Damocles, have a lot less jobs been transferred abroad so far than it was feared only two years ago?

When will the removal vans drive up?

Back then, in March 2017, not even nine months after the referendum, representatives of banks, insurers and investment fund companies, mainly situated in London, threatened to move up to 10,000 jobs. But according to a regular research by the news agency Reuters less than 2,000 jobs have been transferred out of the UK to date due to the Brexit (s. infographic 2).

If you are following the British press, the reasons for this hesitation are not explicit. Is it because the withdrawal negotiations even after almost three years post-referendum still do not indicate where the trip is going? Do CEOs and their board members shy away from making a momentous, costly decision? Or do asset managers and bankers struggle to make a move to Frankfurt, Paris or Amsterdam palatable to their families? Some companies have allegedly started to offer generous packages to their employees if they move to another EU country.

The calm before the storm must not hide the fact that particularly big companies have their contingency plans in place, they have rented office spaces in EU countries and have applied for the required licences at the local authorities. In Luxembourg, British asset managers Columbia Threadneedle, Janus Henderson, Jupiter Asset Management and M&G want to expand or develop their representations, according to the Financial Times. And in the Republic of Ireland, at the end of January the Central Bank of Ireland held more than 100 applications of British financial companies willing to relocate.

„Especially small British asset manager without international representation should signal ‘We‘re still open for business!’“

Clients, assets and a good reputation are at risk

A no deal-Brexit would hit particularly hard any British investment boutiques and specialised asset manager who although having clients in Continental Europe have no local representation, yet.

For some of these asset managers relocation would be too expensive or too elaborate. Others fear the administrative efforts when licensing and distributing UCITS funds. And some are still hoping, to get off with a slap on the wrist by Brexit. But such an attitude can be (much) more costly for smaller companies – for them clients, assets and their reputation are at stake.

An active approach which does not exclude professional help and with an open, honest and straightforward communication should at the latest have priority in this critical phase of Brexit negotiations. In the end it is especially important for smaller UK manager to signal to their employees, clients and cooperation partners that despite Brexit “We’re still open for business!“

Investment writing: How fund managers can demystify financial jargon

Logo FondsTrendsBe it MiFID II or PRIIPS, the growing complexity of investment products and their regulation, calls for a new approach to communication. In a by-lined article for FondsTrends, the newsletter of Hauck & Aufhäuser Fund Services S.A., Ross Hunter, Copylab, and Hagen Gerle, Gerle Financial Communications, explain how professional investment writing can help fund managers to communicate more efficiently with their investors. Read the whole article (in German) here.

Big Brexit and small businesses: How to prepare for the unpredictable?

Monkey sitting on a wooden sign with a warning that it is dangerous to feed animalsA couple of days ago I had an argument with my wife in the kitchen. It was, once again, about Brexit. The day before, Theresa May had received a serious slapping by the joint heads of the EU in Salzburg. I had been agonising for some time about what Brexit would possibly mean for us personally, but also for our business as a specialised PR consultancy (of course, I had written an outline of a few pages about it). When I asked my wife to read the outline, she said, while spooning sugar in her tea, “Well, we’ve really got no idea at all what’s going to happen”.

“This is exactly why we have to think about possible scenarios”, I responded.

“But that’s changing every day now! You’re just wasting your time and energy!”

“And that’s exactly why!”

“But what on earth are you going to prepare for!?”

And so it went on …  thank goodness, the steak knives were already in the dishwasher.

At some point we both agreed that we didn’t know any more than all the other owners of small (and big) businesses who don’t sit at the negotiation table in Salzburg, Brussels or London. Also, that it is extremely difficult to plan for a ‘no deal’ exit from the EU in the face of all these, quite frightening scenarios and questions: (How) Will future services for clients in the EU be taxed? Will it be necessary to provide additional qualifications or licences to do business with clients in the EU? What will be the legal status of EU foreigners in the United Kingdom with a company which is registered in England and Wales?

Being a German national who’s been living in Britain with his German family and British business for seven years (pre-Brexit) and considering all these and many more yet unanswered questions, I do feel like someone is taking the mickey out of me.

Not even every 7th small business is preparing for Brexit

Whether EU foreigner or not, we are by far not alone with our thoughts. According to a survey by the lobby association National Federation of Self Employed & Small Businesses (FSB), fewer than every seventh (14%) small business has started to plan for a No-deal-Brexit. More than a quarter (27%) of small British exporters reported falling international sales in the third quarter 2018, up from 19% between July and September 2017. No wonder that the sentiment among small businesses is low – less than a third of them (29%) believes that their prospects will be any better in the next quarter.

Indeed, it’s not all roses these days: Since the EU referendum on 23rd of June 2016 the growth of the economy in the United Kingdom has been lower than in all other G7 states, companies refuse to invest,[1] and Pound Sterling has lost about 9% of its value.[2] This might sound like good news for exporters but at the same time many goods, especially those imported from outside the UK, have increased in price. In August British shop prices rose for the first time in five years, followed by a warning of the British Retail Consortiums that customers should brace themselves for much higher price increases if there is no Brexit deal. In the same month, inflation in Britain jumped unexpectedly to a six-month high of 2.7%.

Big companies in Great Britain have already begun to relocate their European business to the EU. This is particularly obvious in the financial services industry, as can be seen with Standard Life Aberdeen’s move to Dublin, Lloyds of London’s departure for Brussels and M&G going to Luxembourg. Other companies, such as Airbus and BMW, are keeping their options for a move open. Meanwhile, fewer and fewer qualified employees from the EU are coming to Britain – in the NHS the number of nurses from the EU has dropped between the referendum and April 2018 by more than 7,000.

Adding to price spikes and lack of employees are tax hikes. Many councils have increased their council tax and business rates drastically which, according to a recent study by the City University of London, has become a menace to local businesses in itself. Meanwhile, within four years the British tax authority HMRC has dropped the limit for untaxed dividends from GBP 31,800 to GBP 2,000. Dividends make the lion’s share of income for many business owners with limited companies who were previously sole traders with a higher tax rate.

And now, on top of all that, come the unforeseeable consequences of Brexit …

Active surveillance and stamina

So, what can small businesses like us actually do in the face of such an insecure situation which can turn out to be existentially threatening?

Scenario planning is surely one possibility – meaning the mindful dispute about all possible consequences of Brexit for one’s company and its clients. The association of British public relations professionals, the Chartered Institute of Public Relations (CIPR), organised two scenario workshops this year for communication practitioners of companies, associations, institutions and PR agencies in order to run through the implications of a Brexit. However, due to the escalating events of the last weeks (key words here are “Boris Johnson”, “Salzburg”, “Northern Ireland border”), many scenarios fall short of reality or get overtaken in the left lane by them.

Lobbying is another choice. Associations and professional groups that represent a number of similar thinking companies like the FSB or the Institute of Directors (IoD) have a greater gravity in talks with government representatives than a single firm. This is, after all, the intention of many small businesses for becoming a member in these associations and for hoping that they can give their displeasure a louder voice.

Another option that all small businesses have is active surveillance. This is an approach in which a development of possibly great danger is followed closely for some time without the need to act on it immediately. This not only includes noticing any new Brexit related news with critical distance (not every grumbling by a few backbenchers and the headline in the Daily Telegraph the following day will automatically topple the prime minister), but also looking into developments in one’s own industry and among competitors as well.

With regards to the future treatment of companies from a third country to the EU (the UK after a ‘no deal’) both the European Commission as well as the British government have published some quite useful papers. Especially the EU differentiates very prudently, I think, between “preparedness” and “contingency”. And if you maintain the discipline and stamina to follow that approach without becoming either hectic or depressed, you might actually do quite well.

On a personal note

We have decided for our business to at least try to follow that active surveillance, keep an overview of the really important developments and stay as flexible as possible for all scenarios, so we hopefully won’t drown in the Brexit vortex. Especially us small businesses with their tighter financial and staff resources in comparison to many bigger companies have to keep their eyes peeled but mustn’t be confused about every new horror story about the potential fallout of Brexit.

Detailed plans on whether it’s really worth looking for partners in other (European) countries, applying for local registrations, training staff or broadening one’s own business model can only start once it is clear what the future relationship of Britain with the EU (and the rest of the world) will look like.

Actually, that’s a no-brainer.

“See? That’s what I said from the start!”, said my wife putting the kettle on again.

P.S.: In the upcoming race for the next British PM, following Theresa May, Carolyn Fairbairn, Director general of the Confederation of British Industry has warned all candidates not to consider a ‘no-deal’ option at all, as it would put “severe” damage to businesses. Fairbairn: “Short-term disruption and long-term damage to British competitiveness will be severe if we leave without one. The vast majority of firms can never be prepared for no-deal, particularly our [small and medium-sized] members who cannot afford complex and costly contingency plans.”

[1] Source: Financial Times, 31/07/2018: „The UK economy since the Brexit vote – in 5 charts”

[2] Source: Exchange rate GB/EUR 23.06.2016 and 24.09.2018 Reuters

Brexit scenario planning for PR practitioners

CIPR - Brexit scenario planning rport front page_Page_1What does a successful Brexit result look like from a UK perspective? And how do PR practitioners prepare their clients and organisations for different Brexit scenarios? These were the tasks for a group of 18 PR professionals who met in London end of May for the second “Brexit scenario planning” of the PR industry association Chartered Institute of Public Relations (CIPR). As a Member of the CIPR, I participated in this session, as well, and discussed with colleagues of different institutions about “worst case”, “best case” and “most likely” scenarios. Not surprisingly, the findings for the “most likely scenarios” were not acceptable to the participants in the end. So the groups drew out implications for public relations practice to prepare for Brexit and carry out damage control. Read the complete report of the session here.

Europe in challenging times: Panel discussion in the British Embassy in Berlin

Podiumsdiskussion in der Brit. Botschaft in Berlin (167A4042)It seems to be a platitude that Europe is going through challenging times – in the face of ever so obvious disparities between the Northern and the Southern states, the upcoming exit of Great Britain from the European Union (Brexit) and the ongoing pressure through low interest rates in the eurozone. But which effect do these political and economical centrifugal forces have on pensions in Germany? What are the consequences for independent financial advisors and their clients? Standard Life Deutschland followed these questions in a top-class panel discussion in Berlin which was jointly organised by the British insurer and the British Embassy. Among the participants on the podium were Wolfgang Bosbach, former MP of the CDU and pension expert; Prof. Dr. Clemens Fuest, president of the economic think tank ifo Institut; and Sir Gerry Grimstone, Chairman Standard Life Aberdeen plc. Gerle Financial Communications supported Standard Life in prearing the event with regards to the content.

The last fund manager of London − a post-Brexit Sci-Fi short story

baroudeur regardant le coucher de soleilIt’s the year 2023 and Brexit negotiations have gone terribly wrong. As a consequence, the UK has dismembered itself, an exodus of firms from London to mainland Europe has taken place − and the Shetland Islands are now in third place behind Luxembourg and Ireland for the registration of new funds. A short story by Hagen Gerle, Gerle Financial Communications, and Georg Redlbacher, Multi Boutique Marketers (MBMs)*

A picture from a family holiday in Cornwall, the 2020 stand-up metal award for ‘Best British Alternative Asset Manager (over 3 yrs.)’, a copy of a runners’ magazine – there weren’t many personal belongings left that Adam had to put in his cardboard box this morning. Most of the other stuff had already made its way into his small flat where the big removal boxes were piled up against the wall, or he had simply chucked them in the bin. ‘Travel light’, he told himself. ‘You’ll buy what you need in Helsinki.’ Continue Reading

FONDS professionell: Target missed – PRIIPs are not transparent and incomprehensible

Logo Fonds professionell onlineAt the start of 2018, the new PRIIPs regulation will come into effect. In an exclusive article (in German only) for the German financial trade publication Fonds professionell online, Anke Limbach of management consulting firm Concedro, Hagen Gerle of Gerle Financial Communications, and Peter Clouth of law firm Clouth & Partner have summarised the main points of critisicm about PRIIPs.

upgrade! 02/2017: Two mammoth regulations are waiting for the funds industry

DruckMiFID II and the investment tax reform – there are two mammoth regulations waiting for the German funds industry at the beginning of 2018. The cover story of the latest issue of upgrade!, Universal-Investment’s magazine for its funds partner, deals with the effects of the two regulations for funds sales and investment companies. Once more, Gerle Financial Communications was entrusted by Universal-Investment to do investment writing and editing for the magazine.


PRIIPs: There’s something seriously wrong with communications if the information document contains a comprehension alert

logo-concedroThe acronym may sound quite onomatopoetic and leave the impression of speed – in reality, the upcoming introduction of “PRIIPs” for the investment and insurance industry has more than just one catch to it. The most severe critic is that the new basic information documents for Packaged Retail Investment and Insurance Products lack the qualities for which they are supposed to be launched: transparency, comparability and, most of all, comprehensibility. A joint article by Anke Limbach, Concedro, and Hagen Gerle, Gerle Financial Communications. This article is only available in German.