The past few weeks have brought into sharp focus some of the benefits of managing money using segregated mandates for those that have the necessary scale. Alongside this is a need for oversight of governance not just the investment approach. And, research agencies need to do more to assess governance and liquidity.
Over drinks with an industry mate the other night, he referred to the benefits of segs as the 3 Ps: prescription, price and portability. SJP and Openwork client money isn’t locked in Woodford’s fund. Both firms swapped the manager and both restricted holdings in unlisted securities.
While segs come out looking good over the past couple of weeks they only work with the right governance and oversight. This requires scale, the right culture and the right people.
I hear from a lot of largish financial advice firms that they plan to introduce segregated mandates. There can be enormous benefits but it’s not a decision to be taken lightly. There are a lot of mouths to feed – the ACD, custodian, fund admin, depository, etc.
Scale is needed not just to negotiate on price but also to put in place the necessary oversight. Scale alone isn’t enough. There needs to be a culture that allows people to question decisions and the right people in place to ask the tough questions. Firms managing money using segs need people around the table with legal, investment and regulatory experience to provide the necessary oversight.
What about the customer
The people around that table need to have a keen focus on the reason they are all there. They have a regulatory responsibility to the customer. They also have a moral obligation. We think that too often the customer is forgotten.
Failure of research and ratings agencies?
As for firms not using segs, we need to push research and ratings agencies to evaluate and highlight the governance of funds not just investment approach and performance.
A lot of advisers hold Woodford in models they manage for clients. They will be looking to rebalance those models at the end of the quarter. A few weeks ago it would have looked sensible to hold Woodford. Heck, it had a Morningstar bronze rating in May! Who knew how illiquid an equity fund could be?!
This is exactly why the research and ratings agencies need to shine a light on governance. Advisers rely on third party research to short-list funds. Stress testing portfolios for liquidity seems like a good idea. Ratings can’t be just about investment performance.
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