Woodford performance fee unlikely to cause an Investment Trust revolution
This is a guest post on Investment Trust fees by award winning financial journalist Adam Lewis
The countdown to the launch of Neil Woodford’s first foray into the world of investment trusts is well and truly on. After the extremely successful launch of his debut open-ended offering at Woodford Investment Management (the UK Equity Income launch broke all records after attracting £1.6bn) investors have until just 5pm on 13 April to register their application for the star fund manager’s second offering, the Patient Capital Trust.
Given his previous track record at Invesco Perpetual, Woodford has attracted somewhat of a cult status in the fund management arena. Indeed any mention of his name in the national or trade press will probably contain “guru” when describing his talent in the equity income arena.
With this in mind it did not come as the greatest of surprises that the way in which Woodford structured the fees on his first investment trusts attracted just about as much attention as what the actual fund seeks to do.
Some have labelled Woodford’s decision to forego an annual management charge and instead charge a performance fee (of 15% over an annual hurdle rate) a “gimmick”. Others meanwhile have called it a game changer and predicted a revolutionary shake up within an investment trust sector that is well known for being, well, a bit traditionally stuck in its ways.
I am not sure I really subscribe to either of these suggestions. My problem with labelling it a gimmick is that it tends to suggest that the “guru” needs some form of ‘teaser’ to pull in investors. Well a quick look at the projections for how much the trust will raise ahead of its IPO don’t tend to bear out this gimmick theory.
Woodford is targeting £200m (with an option to extend to £500m) and the consensus among the experts is that he will easily achieve this with the trust likely to go straight to a premium to net asset value at launch.
Aside from a little crossover this fund is not the same as its bigger open-ended brother.However this won’t stop it attracting the “wrong money” as it were. The same happened to Anthony Bolton when he launched his Fidelity China Special Situations fund.
Rather than invest in the China story, investors were simply investing in Bolton hoping for a repeat of the glory days on UK Special Situations. The trust went straight to a premium to NAV at launch as investors rushed through the door, but quickly went the other way when the expected performance did not come through (although he recused it by the end). The point is investors came in because of the reputation of the manager not a fee structure and the same applies with Woodford.
So then this leads to the next question, will other trusts – some of which are over a century old – be compelled to follow Woodford’s lead on their fee structure? Again, I am not convinced. Instead I find myself agreeing with Liontrust’s head of multi asset John Husselbee who describes the fee being used by Woodford as simply a case of “right vehicle, right time”.
Husselbee says: “You are investing in Neil and his team’s ability to pick unlisted stocks, with the plan for them to become listed and make you money as a result.” As such he does not see this fee structure setting the standard for all investment trust launches to follow and given how long the investment trust sector has been around I would tend to agree.
With a national press constantly putting pressure on the fees active funds charge, talk of performance fees and their replacement of an AMC was always going to grab the headlines. However there is one headline I would prefer to see when it come to performance fees: “Fund gives money back to investor when it underperforms”.
Managers always talk about aligning their interests with those of their investors but if they were truly aligned, rather than just not take a performance fee when performance is strong, the fee structure is tiered so that if it significantly under performs investors get something back. Now that would be a game changer …
Adam Lewis is a freelance journalist and content director at Matrix Solutions.
He has worked as a financial journalist for over 14 years, the last 10 which were at Centaur where he lately edited Fund Strategy magazine for three years till February 2015. He has won five awards for journalism excellence, including AIC Trade Journalist of the Year (2002 and 2008) and IMA Specialist Reporter of the Year (2005).
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