Cover Story
but the company’s refusal to waive
fees while the Woodford Equity
Income fund was gated, when owners
Neil Woodford and Craig Newman
had previously taken large dividends
out of the business, left a sour taste.
The final implications may take time
to be understood, but the effects of
the collapse were seen in surprising
places. Suddenly, everyone cared
about liquidity. It could be argued
that this is closing the stable door
after the horse has bolted, but fund
managers now need to have a good
handle on liquidity or be seen to be
doing something about it.
Burdett says the effect has been
most noticeable in the small cap
sector: “It has seen people shy
away from good investments on
liquidity grounds – ultimately that
could be good for active managers.
Small cap is now on a significant
discount to the major market,
whereas historically, it has traded on
a premium. We believe people are
being paid to take liquidity risk.”
The problems for small caps have
been compounded by the changes
to the rules on research unbundling
under MiFID II. Sell-side analysts no
longer have a meaningful incentive
to research smaller companies. This
area has never had significant analyst
coverage and the new rules have left
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“Environmental, social and
governance factors are a
pillar of investing, holding
more than $30tn of assets
after impressive growth of
34 per cent over the past
two years”
it even more neglected. They may
have dented performance in 2019, but
they should create opportunities in
the longer term.
While the Woodford scandal threw
a spotlight on some poor practices
in the sector – the behaviour of a
number of platforms and the rules
on best-buy lists are currently
under scrutiny – there
were elements of the
industry that emerged,
if not exactly smelling
of roses, then at the
very least with
their integrity
intact. Hargreaves
Lansdown excepted,
no major multi-
manager held any
of the Woodford
range at the time of
its demise. The Jupiter
Merlin team had held some
early on, but started to cut its
stake in 2015.
Phoenix from the flames
If Woodford showed the active
investment management industry
in a poor light, the growing focus
on sustainability may yet prove to
be its saviour. This was the year in
which investment managers were
falling over themselves to discuss
their environmental, social and
governance (ESG) credentials. Ethical
and sustainable investing moved
from being a niche pursuit and into
the mainstream.
The rules around fiduciary
responsibility have long made
it difficult to raise money in the
institutional market without a clear
message on ESG, but this year it
became a major factor in the retail
industry as well. Square Mile reported
a surge in interest in the subject from
its adviser base, which is coming
under pressure from clients of all ages
to find sustainable options.
An increasing number of companies
started to integrate ESG factors across
their range, while more and more
‘impact’ funds were launched. This
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