Back in April Woodford stole a march on many of his peers by announcing his firm would absorb research costs instead of passing them onto investors.
His latest move, a scrapping of the bonus element in the firm’s remuneration scheme, is significantly more dramatic.
Since the financial crisis the term ‘bonuses’ in the context of financial services has had negative connotations among the public. Regardless of whether you think this is justifiable or not, it is clear that the word conjures up thoughts of reckless or overly aggressive behaviour.
With some merit it can be argued that the investment banks with their bonus schemes were where the vast majority of the wrong doing leading up to the crisis took place, not within asset managers. This distinction is not made in the minds of much of the public though.
Retail populism
To be seen to banish bonus culture within his firm is therefore likely to only make Woodford more popular among retail investors. That barely seems necessary given he already manages £9bn, but that takes nothing way from the validity of this point.
Whether the remuneration changes will actually lead to better outcomes for investors is debatable though. An elimination of research costs creates a clear and quantifiable, albeit small, reduction in fees that puts money back into investors’ pockets.
In the case of staff bonuses however, it will take years to glean some understanding of the real impact on the end investor, if any.
Risk returns
In the meantime the policy change is not without risk to Woodford and the firm that bears his name. As Chelsea Financial Services MD Darius McDermott pointed out, higher fixed salaries can leave companies backed into a corner.
“It’s a risk for Woodford, Newman and the firm,” he noted. “If you agree certain salaries with staff and the financial performance is not as expected you are left with outsized costs. You don’t have the flexibility a bonus structure allows.”
In terms of benefits to the end investor, McDermott is sceptical. “I don’t think it makes any immediate difference to Woodford investors,” he said. “What they really care about is the performance of the funds, not how the firm pays its staff. What I think is most important is fund groups using remuneration to create an alignment of interests between the end client, the fund manager and the firm itself.”
McDermott said in his view this alignment of interests can be achieved with a move towards delayed compensation where some part of a bonus has to be invested in the company’s own funds or its shares for a certain period, rather than total removal of bonuses. This he pointed out, is a move already well under way across the industry.
Peer pressure
Despite this, Woodford’s decision clearly puts pressure on his peers to either follow suit or explain why they are not going to.
As McDermott alluded to, there may well be very justifiable arguments as to why it does not make sense for other firms to move to fixed salaries, but these must be made clearly and publicly.
Woodford Investment Management is a very different entity to most, if not all, other fund houses. From its recent creation to its near total reliance on one man for its success and the size of its flagship fund, there are few firms which are directly comparable. It cannot therefore be said that should the move be seen to benefit Woodford investors over time, the same would be true in the case of other firms.
BMO Global Asset Management’s Rob Burdett is another professional fund picker who finds the financial upside for investors hard to see, at least initially.
“We are not investors with Neil so are not privy to any detail beyond the headlines,” he said. “I think without details of what is being sacrificed and what salary replaces the bonus it is impossible to say. Given he is making the majority of the decisions though and he owns the vast majority of the company that is the most important factor I would think in examining the remuneration of the company.”
Bonus culture
Burdett also pointed to the alignment of interests issue that McDermott highlighted.
“When we are looking at funds, co-investment from the managers is a key factor and the whole industry is being pushed towards this type of link anyway so any analysis of the bonus culture should take account of deferral rules and whether deferred bonuses are held in the fund managed by the investor,” he said.
“Neil is a very interesting character and businessman, and as has been read today, he and Craig spent a lot of time looking at a good number of incentive packages from a number of sources to arrive at the decision they did,” added Wellian Investment Solutions CIO Richard Philbin. “True, the industry has a long-held pay structure which includes bonuses, but this move today doesn’t necessarily mean all will follow suit. Bonuses have typically been used as a balancing act for companies when times are good – if the company is successful, its employees are too – the bonus acting as a variable measure.”
A nod to the unusual nature of Woodford IM among asset managers was also forthcoming from Philbin.
“Personally I don’t think this is an issue for Woodford IM because the front office is limited and massively directed and dictated by Neil,” he said. “You have to remember he is incredibly wealthy and owns a very large percentage of the business which no doubt paid him not only a healthy pay cheque, but also a nice dividend last year as the company made more than £10m profit in its first year. This might be different if somebody was in a different stage of their professional career and potential earnings profile.”
“This could be different in another firm though, Philbin continued. “From a perspective of ‘is this good for investors or not’ it depends on whether these changing costs are charged by the fund or the trust. “If ultimately it means a cost saving at WIM level of let’s say 5bp, it’s fairly safe to say the 5bp saved will not be used to reduce AMCs or OCFs for example.”
So, while the jury is out in terms of whether the end investor will truly benefit from the changes at Woodford IM, the verdict is in on whether UK asset managers have fresh questions to answer on their remuneration policies.
