Dramatic shares slump that exposes ANOTHER cosy Hargreaves alliance
HOW on earth has the City regulator allowed an investment funds industry to evolve that is clearly not working in the best interests of investors like me and you? An industry that has washed its hands of us, doesn’t talk to us anymore, and panders to no one but the powerful investment platforms through which most investors now hold their long-term wealth.
While we’ve been disdainfully pushed to the sidelines, the platforms and fund managers have been given carte blanche to line each other’s pockets. An incestuous and deeply unhealthy relationship that enriches no one but themselves. An arrangement that enables them to detach themselves from us mere mortals and live splendiferous lives surrounded by fast cars and second and third homes. Lives we can only fantasise about.
Is it because the regulator, the Financial Conduct Authority, has decamped to state-of-the-art offices in Stratford, East London, thereby distancing itself from the machinations of the City? Probably not, although I would like to know what on earth the regulator does out there within a starter’s whistle of Queen Elizabeth Olympic Park.
Or, more worryingly, is it yet another example of regulatory complacency that we last witnessed in the run-up to the devastating and ruinous financial crisis of 2008?
Is the Woodford investment fund debacle that bubbled to the surface just over a month ago the tip of an iceberg that could send fissures through the value of the investments we hold?
Questions, questions and more questions. But ones we need urgent answers to. Is anyone listening at 12 Endeavour Square, London E20, home of the FCA? Indeed, is anyone there awake?
The incestuous nature of the funds industry was highlighted again two days ago when investment platform Hargreaves Lansdown surprisingly announced it was dropping two popular investment funds from its ‘Wealth 50’ – a list of best-buy investments that outrageously included Woodford Equity Income right up until dealings in the fund were suspended on June 3.
The funds in question were Lindsell Train UK Equity and Lindsell Train Global Equity, both run by Nick Train – considered by experts (admittedly the same gurus that loved Woodford) one of the best fund managers in the business.
UK Equity is a £7billion portfolio investing in some of the market’s strongest brands and most tradable shares – the likes of Burberry, Diageo and Heineken.
Global Equity, £8billion in size, holds many of the same shares, but complements them with big brand international stocks such as Nintendo, PayPal and Walt Disney.
Hargreaves’ decision was not driven by concerns over Train’s investments – not an unquoted stock in sight – but all to do with fears it could face yet more criticism for the way it puts its best buy list together. This is because both funds hold shares in Hargreaves Lansdown – indeed mighty slugs of them amounting to 12 per cent of Hargreaves’ entire share capital.
At the end of May, UK Equity had 8.6 per cent of its portfolio (£608 million) invested in the FTSE 100-listed company.
From an outsider’s perspective, it looks like a case of ‘you scratch my back, I’ll scratch yours’. That is: ‘We’ll (HL) recommend your funds (LT), we’ll (HL) hopefully generate more fees as a result of the funds selling like hotcakes, your funds (LT) will attract more money to invest, generating more revenue for you, and you (LT) then invest some of the new money in increasing the stake in our business (HL) – driving our share price ever higher. A virtuous circle that enriches us both – HL and LT.’
A far-fetched scenario? Maybe. But in announcing its decision, Hargreaves Lansdown admitted it wanted to ensure the ‘independence’ of its investment process – that is, remove any suspicion that they were in cahoots with Lindsell Train in the same way they had been with Woodford.
It is too early to tell whether Hargreaves Lansdown’s decision to remove the two funds from its bestbuy list will cause a stampede of investors to head for the exit door.
But it did cause the share price of Lindsell Train Investment Trust to plunge by more than 22 per cent on Friday in expectation that the investment manager’s future revenues would be adversely impacted.
The investment trust owns Lindsell Train Limited, the unlisted business through which all the revenues from Lindsell Train’s various funds are directed.
Analysts at City broker Numis do not expect retail investors to sell their holdings in UK Equity and Global Equity, but they do accept the investment trust’s shares, which stand at a commanding premium to the value of the fund’s assets, could continue to be impacted adversely by negative ‘sentiment’.
For the record, rival platform AJ Bell, a FTSE250-listed company, includes Invesco funds Income and High Income as investment options for clients although they are not on its recommended list. The funds, run by Mark Barnett (and previously managed by Woodford), both hold shares in AJ Bell although the stakes have been trimmed back in the last month.
So where do we go from here? For starters, the regulator needs to clamp down on fund platform bestbuy lists so they are whiter than white. It also has to lay down clear rules on situations where fund managers and fund platforms could be accused of vested interests.
It also has to ensure a better deal for investors (lower fund charges and platform fees) and a bigger opportunity to challenge managers such as Woodford and Train.
Nothing grated more last week than finding out Woodford has been visiting financial advisers explaining what he is doing to put his investment operation back in working order. But for his investors, there has been no such opportunity to engage with him – and give him what for. Just a pretty dreadful five-minute video on YouTube.
Contemptible? Yes. That’s where we’ve got to. That’s where we need to move from. We desperately require a funds industry fit for investor purpose.