Can The People’s Trust break the active management mould?
Posted by Robin Powell on October 24, 2016
Shock horror! For the second time in a week, I’m going to feature a an active fund management company! No, I don’t endorse it, but I do think that, like Orbis Access, whose Director Dan Brocklebank I interviewed last week, The People’s Trust has an interesting business model which I’m hoping will have a positive impact on the UK fund management industry.
The People’s Trust is run by Daniel Godfrey, who was ousted as Chief Executive of the Investment Association in October 2015 after failing to convince its membership to agree to a range of consumer-friendly reforms.
In this interview, Godfrey gives his thoughts on the campaign for transparency in asset management, and explains how his new company aims to provide consumers with something very different to what they’ve been offered until now.
What do you make of what’s happened at the Investment Association in the 12 months since you left?
When you move on, you move on. I’ve been focusing on how I can continue with what I felt was a very valuable mission — to make investment better for investors and for society — whilst also making a living. So to be honest, I don’t really think much about the Investment Association apart from the good relationships I have with many individuals.
You said recently that you felt we might be moving towards greater transparency around fees and charges faster than we thought. What do you mean by that?
The FCA is stepping in to require transaction cost disclosure in the pension space, which must surely translate into retail. I just think that we’ve reached a tipping point where real change is more possible than ever before. The systemic forces against it are weaker and the consensus in the public arena is stronger.
Tell me about The People’s Trust and thinking behind it. What’s different about it?
The People’s Trust has been designed to eliminate conflicts of interest and deliver the best possible returns via an approach that would also have a positive impact on corporate behaviour, the economy and society. This is achieved through 100% ownership of the company by its customers, no bonuses for employees — instead they’ll be paid part of their salaries in shares that they’ll have to own for at least seven years, a seven-year total return objective and a low-turnover high engagement approach to stock selection and stewardship. We’ll also have an allocation of the portfolio to social impact investment; this isn’t charity but this money is very tangibly being used for good.
What are your thoughts on performance fees in UK asset management? What sort of impact have they had on investor outcomes?
There’s too much variety to make any single judgement. I’d say that if they are calibrated correctly, then everyone is happy when they are paid. The existence of a performance fee shouldn’t make a manager make better decisions, but it can reduce their appetite to gather assets (which can dilute performance) and I can see why emotionally, they can be attractive to clients.
How much of a problem do you feel short-termism is in the UK asset management industry? And how much of an advantage do you think your long-term outlook will give you?
I think it is the problem. It is caused by a number of systemic pressures and incentives and they need to be addressed at the source. This is what The People’s Trust aims to do with its structure, governance and long-term approach.
Do you think the media exacerbates short-termism? And would you like to see journalists encouraging investors to taker a longer view?
I think the media is more of a mirror than a cause. And some personal finance journalists do try to educate readers around long-term thinking. I’m sure if companies, investment banks and investment managers stopped obsessing about the short term, business journalists would adapt!
You’re obviously best known for your time as CEO of the Investment Association. What experience have you had of actually managing funds? And what has your record been like?
I’ve never personally managed money, which is why I’m working with Willis Towers Watson and their 110-strong Global fund manager research team! I do have over 30 years experience of this industry and I am confident that together we can identify the investment managers who can manage money successfully against the seven year mandates we intend to offer. And of course, you will be able to judge the track records of the managers we appoint before you invest.
Surely every manager is going to say that they can beat the market. But the data shows that only a tiny number of funds actually do so over the long term. Do you genuinely expect to be in that very small percentage of funds that consistently outperform? And if so, why?
Absolutely yes. But I suspect that when you use the words “consistently outperform” you are looking at a universe of funds, the vast majority of whom are trying to beat the market every year. I think that is impossible over time and it’s not what we’re setting out to achieve. By taking a seven-year measurement window and not referencing our stock selection by any consideration of trying to beat market performance, it’s actually very likely that we will beat the market. For a start, we’ll be trying not to have any exposure to stocks that are going to underperform the market (of course we won’t get that right every time), whereas most index-referencing funds will have underweight positions in those stocks even if they get it right! I’ve never understood why I’d want to pay an active manager to buy and hold shares in companies they believe is going to do badly — that always seemed nuts to me. So if we appoint managers who have skill in this rather old-fashioned style I do absolutely think we’ll beat the market over most seven year periods, but that’s because our objective is the best possible total return not index-beating performance!
What sort of response have you had to what you’re doing from your former colleagues at the IA? And what if anything have your fellow fund managers said?
You might think it’s bizarre, but most people I’ve spoken to in the industry agree that it would be better for clients and the economy if there was radical change leading to longer-term, higher-conviction approaches to investment. But despite this desire on the part of many very good individuals and firms, the systemic forces have rendered it impossible. Until now. If you think about it, most asset management firms have shareholders who will fire the management if short-term profits drop, they have “talent” who will walk out of the door if their bonuses fall when others are offering more and they have clients who will go elsewhere if their relatively short-term performance (at best three years) is behind the median. So it’s not surprising that the industry finds it hard to embrace radical change. That’s why a fresh approach is needed. The People’s Trust has no shareholders other than its customers. Its employees already have no bonus scheme but they do have shares that align them completely to the long-term interests of clients. It will only get off the ground if we can inspire enough customers that they can do better for themselves and society if they can buy in to taking a long-term approach and most important of all sticking to it when the markets are turbulent or performance is diverging negatively from the market in the short term.
Do you expect further disruption of the industry from innovative companies like your own over the next few years?
Who knows? It is really taking all of my brainpower, energy and resources to try to get The People’s Trust up and running! What anyone else does is a matter for them. All I care about is doing the very best I can.