Back in April Woodford stole a march on many of his peers by announcing his firm would absorb research costs instead of passing them onto investors.
The latest move, a scrapping of the bonus element in the firm’s remuneration scheme, is significantly more dramatic.
The positive publicity generated by such a move is considerable. Since the financial crisis the term ‘bonuses’ in the context of financial services has had negative connotations among the public. Regardless of whether you think this is justifiable or not, it is clear that the word conjures up thoughts of reckless or overly aggressive behaviour.
With some merit it can be argued that the investment banks with their bonus schemes were where the vast majority of the wrong doing leading up to the crisis took place, not within asset managers. This distinction is not made in the minds of much of the public though.
To be seen to banish bonus culture within his firm is therefore likely to only make Woodford more popular among retail investors. That barely seems necessary given he already manages £9bn, but that takes nothing way from the validity of this point.
Whether the remuneration changes will actually lead to better outcomes for investors is debatable though. An elimination of research costs creates a clear and quantifiable, albeit small, reduction in fees that puts money back into investors’ pockets.
In the case of staff bonuses however, it will take years to glean some understanding of the real impact on the end investor, if any.
In the meantime the policy change is not without risk to Woodford and the firm that bears his name. As Chelsea Financial Services MD Darius McDermott pointed out, higher fixed salaries can leave companies backed into a corner.
“It’s a risk for Woodford, Newman and the firm,” he noted. “If you agree certain salaries with staff and the financial performance is not as expected you are left with outsized costs. You don’t have the flexibility a bonus structure allows.”
In terms of benefits to the end investor, McDermott is sceptical. “I don’t think it makes any immediate difference to Woodford investors,” he said. “What they really care about is the performance of the funds, not how the firm pays its staff. What I think is most important is fund groups using remuneration to create an alignment of interests between the end client, the fund manager and the firm itself.”
McDermott said in his view this alignment of interests can be achieved with a move towards delayed compensation where some part of a bonus has to be invested in the company’s own funds or its shares for a certain period, rather than total removal of bonuses. This he pointed out, is a move already well under way across the industry.
Despite this, Woodford’s decision clearly puts pressure on his peers to either follow suit or explain why they are not going to.
As McDermott alluded to, there may well be very justifiable arguments as to why it does not make sense for other firms to move to fixed salaries, but these must be made clearly and publicly.
Woodford Investment Management is a very different entity to most, if not all, other fund houses. From its recent creation to its near total reliance on one man for its success and the size of its flagship fund, there are few firms which are directly comparable. It cannot therefore be said that should the move be seen to benefit Woodford investors over time, the same would be true in the case of other firms.
BMO Global Asset Management’s Rob Burdett is another professional fund picker who finds the financial upside for investors hard to see, at least initially.
“We are not investors with Neil so are not privy to any detail beyond the headlines,” he said. “I think without details of what is being sacrificed and what salary replaces the bonus it is impossible to say. Given he is making the majority of the decisions though and he owns the vast majority of the company that is the most important factor I would think in examining the remuneration of the company.”
