05 April 2016

Blog: Woodford breaks ranks on the cost of research

by Bruce Packard | 5 April 2016

Not for the first time, Neil Woodford has broken ranks with the rest of the fund management industry. He has announced that his fund will change the way it pays for research. From this April the fund manager will now pay for research directly. Previously, in line with industry practice, fund managers' customers paid for research, and it was hard for those customers to know if they were getting value for money.

According to the FCA (DP14/3 Discussion on the use of dealing commission regime) UK fund managers pay brokers £3bn a year, of which £1.5bn is spent on research. For some time the FCA has had concerns over the conflicts of interest this creates given the lack of transparency of these costs and what they call “the opaque market for research". Under MiFID II, which comes in January 2018, fund managers will have to follow this approach of paying for research directly. Clearly some of what is driving Woodford’s thinking is a response to this regulation.

The implications for the rest of the industry could be significant. The announcement comes with a stylish infographic on his website, which makes clear that the fund doesn't actually spend much money on broker research.

This transparency is laudable. It is also great marketing. If a fund manager’s investment process is demonstrably lower in cost, this could attract inflows from retail investors. A demonstrable track record is also great marketing. Before 2007 Woodford was (correctly) negative on the investment case for the banks sector. Very few brokers had identified that the sector was seeing deteriorating fundamentals, masked by high reported Returns on Equity that were being flattered by gearing up the balance sheet. Woodford came to his own conclusions, without the help of expensive research from brokers. Most notably, as Richard Fletcher reported in The Daily Telegraph, Lehman Brothers advised in September 2007 "One final tip. Load up on NRK [Northern Rock] for your children, your Mum, your goldfish... it is not going bust, gives an excellent yield, is cheap and is a realistic takeover target – buy it now."

At Capital Access we too believe in transparency, and have based our business model around what the regulator is trying to achieve (transparency and better value for investors). We don’t charge fund managers or their clients for what we do – instead our business model relies on corporate management who have a good investment story and are keen to meet investors. And we don’t give advice to goldfish.