Regulation

Yoke is a year old. 10 things we have learnt about charities.

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Yoke and Company is officially one year old. The company founders are a lot older and we are amazed that the year has gone in a flash.  So what have we learnt and what has changed?

1.      Regardless of all the Charity Commission’s advice on financial governance, it remains normal for trustees to say ‘I don’t do money’. If it’s baffling, it is usually just because the issue has been badly explained.

2.      Being regulated means Yoke never hesitates about the investment advice we give, which goes beyond simply comparing managers; The FCA’s review on investment consultants having conflicts of interest or not being regulated highlighted many issues that have yet to be addressed.

3.      Charity decision making lurches from one quarterly meeting to another. They always have, and probably always will. Difficult decisions often get deferred. No decision is a decision in itself and it is usually the wrong one.

4.      Too many charities regard success as a growing pile of money. Surely this is a measure of failure because the money is there to be spent on charitable purposes.

5.      Charities tend to be cautious; trustees should take more risk for their beneficiaries, just as a parent would for their children. The parents don’t enjoy the rewards, but that’s not why they do it.

6.      Penny wise and pound foolish – investment managers can be expensive but not that different from each other. Getting your risk budget right is free and makes you most of your returns. Obtaining help in this area difficult to find.

7.      The rewards in winning new investment business are huge, so the industry is incentivised to get trustees to change managers frequently. Less change will provide better long-term results. 

8.      The public trust in charities has declined after successive years of media attention and bad practice from a few poorly run organisations. Kid’s Company is becoming a distant memory after Oxfam, but charities need to be less defensive and bolder about the great work they do.

9.      We continue to meet so many amazing charity executives who have passion and bold ideas. The problems manifest when these ideas are passed to the trustee board who struggle to share the confidence to take controlled risks with their assets.

10.   We keep looking for someone else offering independent financial assistance to charities, concentrating on the ‘upstream’ problems that concern the overall financial decisions. Combining this with regulated and totally independent investment advice to charities of all sizes. This currently makes Yoke fairly unique in the UK. 

 

Why are fund managers becoming insecure?

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The active fund management industry is going through an odd patch at the moment and showing signs of insecurity after a decade of confidence. 

Despite the economic crisis ten years ago, the fund management industry has generally ridden a prosperous wave as markets have been propelled ever upwards, with much thanks due to quantitative easing.  According to the Investment Association, the trade body for the fund management industry in the UK, assets under management have doubled to £8.1 billion by 2017. The FCA estimates that operating margins have on average been 36%, comparing favourably against the broader economy where the average operating margin for all UK listed companies, including asset management, was 16%. This is partly due to increasing AUM growing revenues much faster than costs, again improving margins.  

With the rise in profitability, the industry has seen a rise in regulation with MiFID II being introduced in January 2018 and the GDPR coming in May.

So as assets under management and profitability rise, with greater controls through regulation, why is there insecurity in the industry? 

There is a growing consensus from the fund management community that the decade long bull market in real assets may be stalling and returns in 2018 will be negligible at best. Peer group investment performance has narrowed as many fund managers appear to be making similar market calls. Market veterans have seen this before and long-term investors will digest the current hiatus with no more than a slight hiccough.

Does the insecurity exist because of what could be a crossroads of profitability and greater transparency on costs and performance? Research from Invesco PowerShares, a passive fund provider, suggested that 67% of institutional and sophisticated investors believe that MiFID II will result in increased use of exchanged traded funds (ETF) by institutional investors in Europe. The research cites transparency oflow costs and management fees being the top reason given for the expected increased flows into passive investments. 

It might feel insecure about the future and facing margin pressure, but the fund management industry must have the confidence to set out its views on the investment markets, no matter how painful it might seem. Active managers should not worry how they look compared to their peers or the passive competition, but to explain clearly the headwinds they are prepared for and the ones they will let go. They should also be more explicit about the positives of successful active management over passive or ETFs in terms of counterparty and momentum risk.

Clarity on costs and performance is good for investor confidence. Managers must demonstrate conviction on their distinctive investment approach, so clients can make a more informed choice between them. If they cannot achieve this, the managers’ profits will suffer as clients move their money elsewhere.