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Woodford moves early on research fees

05/04/2016

The burden on investor education will continue to move from equity analysts to companies themselves judging by the trends in how equity analysts get paid.  Having already seen a 40% decline in UK broker fee income since 2008, there is going to be further scrutiny and separation of the research component of these fees. All but the very largest listed companies will have to do more of their own investor education as the equity analyst community reduces in numbers and experience. The high-profile UK fund manager Woodford Investment Management ($21bn AUM) has announced that its flagship Equity Income Fund will cease to charge research fees directly to the fund, and instead charge them against their own profits. Woodford’s move is refreshing in the face of the wider  industry’s attempt to resist even disclosing these additional fees, let alone taking the burden on themselves. It is likely that EU regulation will make this mandatory in the near future.

Last year we highlighted the 40% decline in broker commissions since 2008 in our article The Growing Equity Research Gap. Woodford’s move highlights continuing pressure in this area.

Investment funds charge a management fee to their investors as a percentage of assets under management. Over the last decade they have come under pressure to clarify the additional charges that are applied directly to fund assets, notably dealing costs.

A fund that trades frequently will accrue far higher trading costs than one that trades sparingly, yet these costs were not seen by investors. Worse, trading costs include money paid for broker research. Industry observers argued that if fund managers are paying for help to research their portfolios, that should come out of their cost budget, not investors’ funds. This cost allocation is likely to be mandated under the EU Markets in Financial Instruments Directive II (MIFID II). This goes further than the UK SFA’s OCF (ongoing charge figure) required disclosure which does not include dealing and research fees.

Woodford disclosed that in addition to its 0.75% OCF, a further 0.14% is charged in fees directly to its client funds, of which  0.02% is for research. This sounds modest but represents 2.7% of Woodford’s fee income on the fund, or about $2.5m. By charging research expenses to the fund management P&L rather than to assets under management, fund managers, who have always regarded research as “free”, will be a lot more picky about who they pay and while this should help the best research analysts, it will overall likely continue to lower industry revenue. Meanwhile the trend to avoiding using brokers altogether when trading is also denting broker fee income and therefore research budgets.

We listed the action companies could take in our previous “Research Gap” article, link below. Last week we looked at the advice given to companies by the CEO of the word’s largest asset manager, BlackRock, whose research cost must run into the hundreds of millions of dollars. Next week, as promised, we’ll publish our investor red-flag list of company disclosure and behaviour that reduces the population of investors who might want to take a stake in your firm. Contact us if you would like to discuss your investor education and internal analysis needs.

Related links:
Woodford – further fee transparency
Oakhall – the growing equity research gap
Oakhall – how to win over the world’s biggest investor

Merryn Somerset-Webb FT/Moneyweek – performance fees
Unbundling rules of MIFID II
FT – Fund managers urged to follow Woodford

FT – Investment Association chief steps down after attempting to push for greater disclosure

Oakhall was established in 2015 by award winning equity research analysts to provide smart financial analysis and articulation for European public and private companies. Founder Andrew Griffin spent almost two decades as a technology equity analyst, ultimately as managing director of European technology equity research at Bank of America Merrill Lynch, before working in investor relations, corporate development and market intelligence for a UK listed software company.