There are stupid forms of greed too

Mark Denning departed Capital Group five days after the asset manager was approached with claims that he had used a “secretive fund” to personally invest in some of the same businesses supported by funds he helped to manage on behalf of clients, according to a documentary to be screened tonight.

The claims, which suggest ordinary investors were exposed to serious conflicts of interest, are the latest blow to the fund management industry, which is under close scrutiny after the scandal surrounding Neil Woodford, the former star stockpicker.

The BBC’s Panorama alleged Mr Denning, 61, used a fund based in Liechtenstein, called Morebath Fund Global Opportunities, to buy the shares. The fund appeared to be named after the village of Morebath in Devon, where he owns a nine-bedroom house, Panorama said.

Front running your book is a bad idea in the first place. But to then provide such obvious evidence linking you to it is just stupid.

16 comments on “There are stupid forms of greed too

  1. after the scandal surrounding Neil Woodford, the former star stockpicker

    What scandal? He picked the wrong stocks. That’s just a risk inherent to the business.

  2. The BBC reports that he made a credible claim to have acted within the letter of the rules as he was not a beneficiary of the Trust, so he saw no need to hide what he was doing.
    He had to resign because the media announced that there was opportunity for conflict of interest, not because he took advantage of it. BBC have not showed that he did “front-run”, just that he could have done so – in fact it reads as that he bought the shares for Morebath after he bought them for Capital Group thereby benefiting outsiders at Morebath’s expense rather than vive versa.
    However “Caesar’s wife must be above suspicion”

  3. After 30 years of being told by brokers that you (or rather your commission flows) are really special, some of them start to believe it. As I understand it he married one of his former brokers so I suspect he is susceptible.

  4. @Andrew M

    Arguably Woodford’s picks were wrong in ways not inherent to the business (ie avoidable without any need for psychic foresight) in that he got into positions that were very hard to get out of if/when investors started to withdraw their capital, resulting in things getting frozen. I don’t know whether he would have avoided that if he had been given more challenge from his employees – or in his old gig, from his employers – but given how rare it is for funds to be frozen and the way his investment choices together contributed to this result, it was surely avoidable if he had put his mind to the task of avoiding it.

    I did wonder whether Woodford could have been unlucky – maybe these picks might still have been “good” in the sense that statistically they had a high probability of outperforming the market, but it just didn’t eventuate (or even that these picks might yet outperform in the long term and it’s unfortunate that we are judging their performance in the wrong timeframe) but I think the freeze goes beyond luck and into the territory of judgment and priorities.

    The other aspect that might be regarded as “scandalous” is that so many small-scale investors put their savings into Woodford’s fund simply because they’d heard of the name and thought he was a safe pair of hands, without realising that his investing style at his new funds was substantially riskier than where he had made his name. But I don’t think that’s fair to lay entirely at Woodford’s door. Investors invest at their own risk and it is up to them to inform themselves or seek appropriate advice. Middle-class pensioners grouching on the TV news that “we knew there was a possibility the fund could fall in value, though we thought our money was relatively safe, but nobody told us our capital could be frozen for months!” get short shrift from me, since freezing is at least a possibility in managed funds (albeit a highly unlikely one) and at any rate if they were prepared for the theoretical possibility their capital could be wiped out by bad picks, and were prepared to accept that risk and the financial pressure it would put them under, then frozen funds are not so bad in comparison. There are definitely people investing who probably shouldn’t be, at least without further advice, and I think the likes of Hargreaves Lansdown should be taking some of the rap for how much money from that kind of investor ended up with Woodford. What’s on the face of it promotional material wrapped up as mere “information” or “journalism” and oh no definitely not “advice” at all… So that could plausibly be considered “scandalous” but only Woodford’s fault in so far as he helped cultivate the image of the “star” investment manager, while others bear rather more responsibility.

  5. “Morebath in Devon, where he owns a nine-bedroom house”

    Nine bedrooms? Yes, he’ll need a few more baths.

  6. Re Woodward, running an equity income fund is very different from running a small cap tech growth fund. One of his big problems is that his income fund held large positions in these small tech companies that never looked likely to pay divvies. Even worse, as I understand it, one of these companies was looking at ways of exploiting cold fusion! And another was developing plastic cargo pallets with embedded geo location chips, that cost about ten times as much as wooden pallets. Who would invest in an income fund that held such sh1t?

  7. “The BBC reports that he made a credible claim to have acted within the letter of the rules as he was not a beneficiary of the Trust, so he saw no need to hide what he was doing….Caesar’s wife must be above suspicion”
    An important point about conflict of interest (followed the rules isn’t a good defence) and something that seems to have been forgotten about the Biden’s where the BBC keeps stressing the accusations are unproven etc.

  8. @MyBurningEars October 21, 2019 at 1:01 pm

    Hargreaves Lansdown should be taking some of the rap for how much money from that kind of investor ended up with Woodford. What’s on the face of it promotional material wrapped up as mere “information” or “journalism” and oh no definitely not “advice” at all

    +1 on HL

    Woodford invested too much in unlisted companies – hence the lockdown. It’s in administration now.

    As usual Gov’t regulator FCA runs away and hides behind sofa

    Investments: UT vs IT – IT can always be cashed out

    @RichardT

    Very good : )

    @Diogenes

    “plastic cargo pallets with embedded geo location chips, that cost about ten times as much as wooden pallets” – a tech company like WeWork then? /sarc

  9. I can understand the potential conflict of interest in this; but wouldn’t the ideal regulatory regime be that all fund managers had to keep their investments in the same funds that they manage?

  10. @James

    While I see your point on a basis of “let the bridge engineer sleep underneath the bridge he has designed or built”, I’d rather my fund manager was rewarded based on how well the fund’s performance matched its stated aims and attitudes to risk, rather than how well it matched their own investment objectives (which may be different from mine and different to the stated purpose of the fund).

  11. James, MBE;

    Some sort of performance charge? Some sort of high watermark?

    Woodford was being creamed over by the financial elements of the press and media while he was still at INVESCO, running income funds. His reputation amongst those muppets appears to have been based on the performance of those funds over the GFC and TMT crashes. For the TMT bubble, the avoidance of the sort of hits that nearly everyone else took over May-June 2000, was because they were bloody income funds and none of that dot-com shite paid any dividends. Those funds he ran simply didn’t have the exposure to the downside, and investors rarely congratulate managers on gains, but whine bitterly at length about any sort of loss.

    Which is a similar situation to another “star” fund manager at Fidelity at the time; Anthony Bolton, who ran Fidelity Special Values. Different type of fund, limited number of holdings, and quite a concentrated portfolio. In the latter part of the nineties, FSV had quite a chunk in Nokia, Microsoft and the like. By the end of 1999, Bolton had begun to shift those positions to cash and equivalents, which was pretty much complete by March 2000.

    When the TMT bubble burst two months later, his funds didn’t suffer those losses. The financial press started wanking themselves silly over what a great manager he was. And then he retired.

    Which lead to a wave of redemptions from the open-ended vehicles he managed, simply down to the superstar effect. If you stripped out the TMT bubble, Bolton’s returns before and after aren’t particularly great, across all his funds, not just FSV and Special Situations.

    For the manager, open-ended and closed-ended vehicles have different attractions; closed-end funds are captive capital, a £200mln fund with a 1% annual management fee will pretty much pay all your bills, year on year. Investors bear any discounts or premiums on the price, and might suffer from poor liquidity, but the effect of those upon assets under management and thus the fee are pretty much non-existent.

    For open-ended funds, subscriptions and redemptions affect assets under management directly, and thus the annual fee to the firm. With a superstar manager, AUM can ramp up really quickly, and it will die really quickly as well.

    For a lot of firms, Fidelity, Aberdeen, F&C, there’s typically both vehicles in existence, with pretty much exactly the same portfolio, so the firm shouldn’t suffer too badly from swings in AUM, as the closed-end fund provides a floor beneath income from annual fees.

    What the idiot Woodford did was get a liquidity mismatch between the portfolio holdings in the open-ended fund and subscriptions/redemptions. Since the two vehicles held broadly the same portfolio, once redemptions ramp up, both funds enter a death spiral as valuations on the private equity/venture positions start falling as the open-ended fund increasingly becomes a distressed seller.

    And we’ve been here before with the commercial property funds a few years back.

    As far as the IFAs go; they are rarely the sharpest tools in the box. They are most often paid via commissions from the asset manager, which investors often prefer as they don’t see that line on an invoice. Mucking around with fees at the manager level, won’t really have much of an effect at the retail/IFA level.

  12. @Ducky

    I think IFAs have been barred from receiving commission on investment advice for a couple of years now, except trail commission on products sold before 2013 which must still be a nice little earner for many. No idea whether this has improved the average quality of investment advice, or indeed whether IFAs have suddenly developed a deeper interest in mortgage and insurance broking and equity release where they’re still allowed to nab commission from their recommendations…

    https://www.moneyadviceservice.org.uk/en/articles/guide-to-financial-adviser-fees#financial-adviser-fees-vs-commission

  13. MBE, yeah, it probably has. And it probably hasn’t, and they probably have. At least, going by the rubbish that drops through the letterbox, anyway.

    I suppose that at least one other issue is the growth of fund platforms and the asset-gatherer types white labelling funds for them, which again has being going on for a good twenty years anyway. Lots of different names in yer actual portfolio, not so many underlying managers, holdings or asset classes. I’m guessing that will blow up big time, sooner or later (and I think one of them has already gone titsup.com a while back).

  14. Hah, did you not get the memo?

    Leveraged derivative structures and ETFs are where all the hot action is these days, those passive index trackers are just so de trop.

  15. @MBE

    No comission etc

    Dear Mr GP/Dentist,

    You +1 are invited to the Pfizer NSAID Efficacy 7-Day Conference in Miami, only £1,000 ppp (tax deductible) for flights and full-board inc “refreshments”, each day will have a choice of lectures and tutorials, all CPD compliant. One year’s CPD at one event.

    Regards,

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