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AIM High: Fund Governance · Two in Twenty

• 0:02
  SPEAKER_03: Hello and welcome to another episode of Aim High.
• 0:05
  SPEAKER_03: My name is Twink Field.
• 0:07
  SPEAKER_03: I'm the CEO and founder of White Marble Marketing and Director of the Association of Investment Marketers.
• 0:13
  SPEAKER_03: And we are in this podcast having conversations with a range of experts across the product industry as well as giving hopefully helpful tips for careers.
• 0:24
  SPEAKER_03: And today we are getting more stuck into the product side of things.
• 0:29
  SPEAKER_03: I'm having a conversation with Stuart Alexander, a friend of many years in the industry, who is the CEO of Gemini Investment Management.
• 0:38
  SPEAKER_03: It's actually a business that has a UK business, which is around fund distribution, as well as an Irish domicile platform for fund hosting.
• 0:47
  SPEAKER_03: So we'll be talking around fund governance.
• 0:51
  SPEAKER_03: Not necessarily a subject that you thought we'd be bringing you, but one that is increasingly on the agenda.
• 0:57
  SPEAKER_03: So I hope you enjoy it.
• 1:00
  SPEAKER_03: So great to have you with us, Stuart.
• 1:02
  SPEAKER_03: Thank you so much for joining us to talk about the wild world of governance.
• 1:08
  SPEAKER_00: The wild west, I believe.
• 1:10
  SPEAKER_03: Yeah.
• 1:10
  SPEAKER_03: Well, I think that's uh it's interesting that it's on the agenda as it is today.
• 1:14
  SPEAKER_03: It's not necessarily something that I've had loads of conversations around over my career.
• 1:19
  SPEAKER_03: So it'd be great if you could not only introduce yourself to start with, but also maybe just give some context as to why kind of governance is so pertinent.
• 1:28
  SPEAKER_00: Oh, well, thank you for having me along.
• 1:30
  SPEAKER_00: Um yeah, it's Jill Alexander.
• 1:32
  SPEAKER_00: I'm chief exec of a business called Gemini Investment Management, which is a UK-based business which um helps fund managers launch products into the market, but also has the platform in Dublin under the Gemini Capital uh brand, um, which is a fund management company with about 3 billion of assets and 20 different funds on them.
• 1:55
  SPEAKER_00: So yeah, delighted to be here.
• 1:56
  SPEAKER_00: Fund governance is an issue, as you say, today when quite honestly, until about probably two or three years ago, people didn't talk about it.
• 2:05
  SPEAKER_00: Um as I joked before, I only just learned to spell it uh about a year ago.
• 2:09
  SPEAKER_00: But it is, it's come into the public and sadly the regulators' eyes because in certain last 12 months, because of uh a certain Mr.
• 2:17
  SPEAKER_00: Woodford.
• 2:19
  SPEAKER_00: Um, but fund governance has always been around, it's just never been in the public eye.
• 2:24
  SPEAKER_00: But because of what's occurred in the last 12 months, it has now become far more prevalent uh to uh both regulators but also to fund management businesses to make sure they have good strong governance.
• 2:38
  SPEAKER_03: So before we maybe get stuck into the sort of really unpick maybe a bit of what went wrong or why sort of the governance wasn't more robust than way over at Woodford, um maybe we could just catch up a little bit as to how oversight has been introduced over time in kind of across the range of products from the USISOIC sort of offshore product.
• 3:01
  SPEAKER_00: Well, if you go back into the depth of time when unit trusts were the most prevalent product sold into the broader market, by their name, the definition is trust, and therefore there were trustees involved.
• 3:15
  SPEAKER_00: So you had a board of trustees, and those trustees were generally in-house individuals who may well have been someone from the compliance team or someone from the marketing team and so on.
• 3:26
  SPEAKER_00: But all their job was was to basically sign off on the financials and make sure that the fund manager adhered to certain rules, such as if it's a UK fund, it's investing in UK stocks and not going off and buying Brazilian debt or something.
• 3:39
  SPEAKER_00: So, but but fast forward to more recent times when the trust trustees changed into a corporate structure and we developed the open end investment company, or OICA as we would refer to it, where you have shareholders and you have a board of directors who are responsible for all of that oversight.
• 3:59
  SPEAKER_00: Nothing really changed fundamentally, certainly when they first came out in the late 80s, early 90s.
• 4:04
  SPEAKER_00: But then as the regulator got more involved, they started to put policies and procedures in place.
• 4:10
  SPEAKER_00: Um, things something like the USICS rules, where you have a 5, 10, and 40 rule.
• 4:15
  SPEAKER_00: I don't know if you're familiar with that, but basically five stocks can't be more than 40% of the portfolio, and no one stock can be more than 10%.
• 4:22
  SPEAKER_00: That is actually the only hard, fast rule on a UCIT.
• 4:25
  SPEAKER_00: Everything else is interpretive rules.
• 4:28
  SPEAKER_00: So it's it's basically how you see those rules and playing um uh playing by those rules.
• 4:34
  SPEAKER_00: And we'll come back to that, I'm sure, with interpretation of rules is one thing because what you might think may well be different from what I'm thinking on a particular rule.
• 4:44
  SPEAKER_00: But at that point, when we have the 510-40 rule, other than that, there was very little other other governance, and so the regulators started to impose certain things such as risk policies, um, business continuity plans, which is a common procedure these days across all businesses.
• 5:01
  SPEAKER_00: And then you had things such as uh risk mitigation policies, um, investment policies.
• 5:07
  SPEAKER_00: I mean, the policies now take up so much of your hard drive.
• 5:12
  SPEAKER_00: Um, it's unbelievable.
• 5:13
  SPEAKER_00: The the ability to actually pull these policies in place has created a regime of significant oversight, both in the terms of what the funds are doing, but more importantly, what the fund managers are doing.
• 5:27
  SPEAKER_03: Yeah.
• 5:27
  SPEAKER_03: So when so I guess to the role of the board to represent the interests of shareholders, what does good look like then today in terms of those boards setting out robust challenge and ensuring that they do get full oversight across all the key functions and assurance that they are all working as they should be, and whether they are hard rules or interpretive rules, that they are to the interests of the shareholder.
• 5:56
  SPEAKER_00: Well, as you just pointed out, the the role of a board is to represent the shareholders.
• 6:02
  SPEAKER_00: That's all they do.
• 6:03
  SPEAKER_00: They don't represent the fund manager, uh, whereas on the trustees, they represent the fund.
• 6:08
  SPEAKER_00: And if I may just go off on a segue, going back, you would have had collective, you wouldn't have had collective responsibility, you would have had individual responsibility.
• 6:18
  SPEAKER_00: I know we'll be talking about SMCR at some point, but yeah, back in the sort of 70s and 80s, you went to a firm like Casanova or Schroeder's or people like that, they the partners were directly responsible for what went on in the business.
• 6:30
  SPEAKER_00: So if something went wrong, they were on the hook.
• 6:33
  SPEAKER_00: The individuals were on the hook.
• 6:35
  SPEAKER_00: Fast forward to Big Bang in um 1986, um, that changed.
• 6:40
  SPEAKER_00: And suddenly collective responsibility came in, and so suddenly the company was responsible.
• 6:45
  SPEAKER_00: So the individuals went off the hook.
• 6:46
  SPEAKER_00: Even the directors get effective came off the hook.
• 6:49
  SPEAKER_00: Um so that responsibility changed, and we now have that we moved back in with SMCR individual responsibility.
• 6:58
  SPEAKER_02: Right.
• 6:58
  SPEAKER_00: So you have uh take an example of the Irish market, you have designated functions with designated people, persons, as we call as we call it.
• 7:07
  SPEAKER_00: So the DP function, that individual is responsible for certain things, such as financials, compliance, um, investment risk, investment management, and so on.
• 7:16
  SPEAKER_00: They are literally responsible to making sure that the fund is run as per the um the fund profile and the the supplement which is in the prospectus.
• 7:27
  SPEAKER_00: So that individual, therefore, would be in front of the regulator if it all went wrong.
• 7:32
  SPEAKER_00: So you have to take it seriously.
• 7:34
  SPEAKER_00: And equally, the the uh non-execs and the independent non-execs are also on the hook.
• 7:40
  SPEAKER_00: Um, I remember coming to the industry back in the late 80s, and the idea was that at some point in the future I would get lots of non-execs and retire gracefully into the into my landed mansion somewhere in Hertfordshire or whatever.
• 7:54
  SPEAKER_03: Is that not happening?
• 7:55
  SPEAKER_00: No, not that happening because the risk and the aspects of being a non-exec is significantly greater than the good old days when you'd turn up for lunch four times a year, listen to the board talking, you'd sign off on the accounts and go home, having had a very nice lunch.
• 8:12
  SPEAKER_00: Today, monthly reporting, daily accountability means that the the risk profiling of a non-exec is significantly higher than it's ever been.
• 8:21
  SPEAKER_00: So, anyone who wants to become a non-exec, by all means go for it, but be aware the risks associated with it are significant than they've ever been.
• 8:29
  SPEAKER_00: And so get training and all that stuff.
• 8:32
  SPEAKER_03: And, you know, people would say, and actually, you given your businesses that it's as it should be now, you know, that that those roles and responsibilities, that accountability is there now and has teeth.
• 8:42
  SPEAKER_03: Um so you know, reassuring for investors in terms of where they're putting money in the governance in the products that they're investing in.
• 8:50
  SPEAKER_00: Um But you're never gonna you're never gonna stop fraud.
• 8:54
  SPEAKER_00: You know, it's almost impossible to stop.
• 8:57
  SPEAKER_00: But you can reduce and mitigate for those uh those possibilities by having strong governance and making sure people like your custodians, the depository, the administrators are doing their job properly.
• 9:09
  SPEAKER_00: And that helps.
• 9:10
  SPEAKER_00: And then having and you have good strong oversight and you have good, strong, independent non-execs, they reduce that risk because they will spot things again again.
• 9:20
  SPEAKER_00: Going back, non-execs in the past probably didn't have the training and the qualifications today.
• 9:25
  SPEAKER_00: You have to have proper training, you have to have the qualifications, you have to have the experience.
• 9:28
  SPEAKER_00: You can't just become non-exec after you know five minutes in the business.
• 9:31
  SPEAKER_00: You've got to have longevity in the industry to to basically see all different investment cycles, economic cycles, and obviously changes and experiences within business.
• 9:41
  SPEAKER_00: So, yeah, it is a it is a different market.
• 9:45
  SPEAKER_03: So, in that context, then uh how is it that so recently we saw the situation that unfolded with with Woodford?
• 9:55
  SPEAKER_00: Um I think it's it it it precedes Woodford by some years.
• 10:01
  SPEAKER_00: We if you go back to the 80s and 90s, the development of boutiques was really in its infancy.
• 10:08
  SPEAKER_00: And so you had a lot more control, you had large organizations, and don't forget, there were there were issues.
• 10:13
  SPEAKER_00: I mean, who can forget the Peter Young Affair uh in 96?
• 10:16
  SPEAKER_00: And we had other situations where fund managers spectacularly blew up by making poor decisions or there was poor oversight.
• 10:23
  SPEAKER_03: Can they just uh jump in for a second, given our audience?
• 10:26
  SPEAKER_03: Uh do you want to talk about the Peter Young affair just briefly so we get the reference?
• 10:30
  SPEAKER_03: Yes.
• 10:31
  SPEAKER_00: Um I thought you'd talk about me being young.
• 10:33
  SPEAKER_00: Um Peter Young was a fund manager at um Morgan Renfeld, Deutsche, who um invested in some rather entertaining stocks.
• 10:44
  SPEAKER_00: Um basically there was fraud done um with the stocks he was buying, so he was front running some of those stocks.
• 10:49
  SPEAKER_00: Um it was spotted, he went on holidays some uh for a couple of weeks or something.
• 10:53
  SPEAKER_00: It was spotted whilst he was away.
• 10:55
  SPEAKER_00: Right.
• 10:55
  SPEAKER_00: He came back, and uh Deutsche got at the time, I think still is one of the biggest finds ever by the regulator.
• 11:02
  SPEAKER_00: Um there's some side issues regard to Peter Young, which are quite entertaining, and I I would uh For a longer podcast, maybe for a longer podcast.
• 11:11
  SPEAKER_00: Um suffice to say, a jar of Gherkins is involved.
• 11:15
  SPEAKER_03: Wow, okay.
• 11:16
  SPEAKER_03: Mine boggles.
• 11:17
  SPEAKER_00: Yes, it does.
• 11:18
  SPEAKER_00: Google it.
• 11:19
  SPEAKER_03: Anyway, sorry, I put you off your stride.
• 11:21
  SPEAKER_00: You're talking about to sort of the boutiques and yeah, so the development of boutiques really started to take place in the late 90s and and the early and the uh early noughties.
• 11:31
  SPEAKER_00: But most of those boutiques were involved in the hedge space, so very concentrated portfolios, obviously long short, momentum driven, whatever it may be.
• 11:38
  SPEAKER_00: There were different types of stuff, but they weren't focused onto the private clients, they're more high net worths and uh institutional style.
• 11:46
  SPEAKER_00: Um so the governance of those was uh was sort of laissez faire.
• 11:51
  SPEAKER_00: So let's put some context around the difference between an alternative fund and a UCIT.
• 11:56
  SPEAKER_00: If you launch an alternative fund, um, there's very little oversight needed by the regulator because they know it's going to be sold to high net worths and private banks.
• 12:04
  SPEAKER_00: With a USIT, they know it's a mass market, it's gonna be sold to mums and pops effectively.
• 12:09
  SPEAKER_00: Um so for launching a USIT, the uh to go back and forth when you've done the documentation to the regulator can take, and a lot of the old you know, people in the marketing team will know this, it can take anywhere between 10 and 16 weeks.
• 12:22
  SPEAKER_00: With an with an alternative fund, it can take three days because they am they know that they the fund is not gonna be sold to the moms of ops.
• 12:31
  SPEAKER_00: There's there's limitations as to that.
• 12:33
  SPEAKER_00: So the boutiques were focused very much on these the alternative space.
• 12:38
  SPEAKER_00: As the noughties developed, they started to grow in their assets and they started to launch UCIS funds.
• 12:44
  SPEAKER_00: And there's a number of examples out there where funds fund management developed out of the alternative space, and at which point the I guess culturally the businesses had to change because previously their reporting on the AF was quite limited.
• 13:01
  SPEAKER_00: Now the reporting on the USIS is significant.
• 13:04
  SPEAKER_00: It's you know, it's a monthly report, it has to be prepared for the board, etc.
• 13:08
  SPEAKER_00: The AFIT's very different.
• 13:09
  SPEAKER_00: So I think the regulator would look around and say, Well, we need to see the filings, we need to see the reporting, what's going on.
• 13:16
  SPEAKER_00: Um most of that historically has been done in-house with very little independence.
• 13:22
  SPEAKER_00: What we uh and a lot of boutiques did that from a cost point of view, they brought it in, they kept it in-house.
• 13:29
  SPEAKER_00: Um as it launched the USIT, they had to basically make sure that the fund was managed correctly, so then they started to look at external uh independent and research.
• 13:39
  SPEAKER_00: The Woodford Affair, I'd say, was preceded by the by many other fund management businesses, which probably sail close to the wind.
• 13:48
  SPEAKER_00: The the issue has always been about the oversight of the individual fund managers and the controls that have been put in place to make sure that they run the fund according to the prospectus, according to the supplement that is that's embedded in what they do.
• 14:04
  SPEAKER_00: Because the boutiques probably, to a certain extent, had a freedom, a laissez-faire approach to what they were doing because they were allowed to, that's fine.
• 14:14
  SPEAKER_00: Converting that into the USIS umbrella meant actually much stricter controls.
• 14:20
  SPEAKER_00: And that's when sometimes it falls over because they're they don't have the people and the procedures and the processes in place.
• 14:28
  SPEAKER_00: And I said, you know, saying before, the the number of policies that you have to have within a business today is a multiple of 10, 15 times what it was just 10 years ago.
• 14:39
  SPEAKER_00: And so the boutiques have had to catch up.
• 14:42
  SPEAKER_00: Very few businesses like a JP Morgan or Black Rocket Fidelity are gonna have issues in this space because they have significant resource to put behind it.
• 14:52
  SPEAKER_00: A lot of the smaller businesses won't have that.
• 14:55
  SPEAKER_00: Woodford, I think, was a different kettle of fish.
• 14:58
  SPEAKER_00: And the reason I say that is because it was, you know, Woodford as an individual was an interesting character, uh, very, very driven individual.
• 15:08
  SPEAKER_00: Um obviously there's a bit of an ego there.
• 15:12
  SPEAKER_00: You call it business Woodford Investment Management, it's your name over the door.
• 15:17
  SPEAKER_00: But he's his approach to running the fund was his approach, not the company's approach.
• 15:23
  SPEAKER_00: There's it's he's noted that a number of the non-execs moved on very quickly.
• 15:30
  SPEAKER_00: He had a number of people, uh high turnover of staff, particularly the compliance, marketing time team who moved on.
• 15:36
  SPEAKER_00: And I think those controls basically were were probably, I'm careful with my wordings here for the case of lawyers listening in, um, they were they weren't tested.
• 15:48
  SPEAKER_00: Yeah.
• 15:49
  SPEAKER_00: And and I think it was his way or the highway.
• 15:53
  SPEAKER_00: And I think if the oversight had been stronger, there'd been stronger independent non-execs, either independents outnumbered the non-execs, then you would have had a situation where they would have said, no, Neil, you can't do this, you can't do that.
• 16:07
  SPEAKER_00: But this comes onto a different issue, which is how you interpret the rules and how you control those rules.
• 16:16
  SPEAKER_00: The interpretation of those rules is very simple.
• 16:19
  SPEAKER_00: Because the only hard hard fast rule is the 51040, we mentioned before, then you interpret accordingly.
• 16:27
  SPEAKER_00: You can run a portfolio very simply.
• 16:29
  SPEAKER_00: Five stocks make up more than no more that make up more than four 40%, and no one stock makes more than 10.
• 16:35
  SPEAKER_00: Well, in Neil's case, well, because he had such a small cap bias, he was ever likely to go breach the 10% rule and very unlikely to breach the 540.
• 16:46
  SPEAKER_00: So fine, tick-tick, not a problem.
• 16:48
  SPEAKER_00: The interpretation of how he got around um the illiquids, and this is my bug and why I'm so passionate about this, is that you know you should not have illiquids in a liquid portfolio.
• 17:00
  SPEAKER_00: We can talk about that momentarily, but that interpretation of what he did by putting his illiquids into special purpose vehicles which were listed, so unlisted in a listed vehicle, that's red flag right there.
• 17:14
  SPEAKER_00: Red flag everywhere.
• 17:15
  SPEAKER_00: But he was allowed to do so because it was within the rules.
• 17:20
  SPEAKER_00: The moral issue, however, needs to be challenged at this point.
• 17:25
  SPEAKER_00: How did a board, how did the oversight allow that?
• 17:29
  SPEAKER_00: And it's not not necessarily the ACD, but it's yeah, it could be the custodian, the depository, could be the board itself.
• 17:35
  SPEAKER_00: They sort of said, hang on, we're not paying by the letter of the rules here.
• 17:40
  SPEAKER_00: And and I think in a situation like that, it's people internally, this is not about whistleblowing, but somebody say within the marketing department sees something like that, should question, and have the ability to question and challenge the fund manager to say, hang on, is that right?
• 18:00
  SPEAKER_00: Our investors being missold here in a situation where we're we're buying a fund which has got SPVs in, special purpose vehicles out of Guernsey.
• 18:09
  SPEAKER_00: I would say that there's every, it's not just by the iron edge, it's not just by depository, it's not by custodians, it's about people within the business who have the ability to do that, who can go and challenge, not necessarily directing someone like Mr.
• 18:22
  SPEAKER_00: Woodford, because that would be a short conversation, but potentially, you know, go to their managers and go to the board and say, I noticed the situation here, we need to be aware of this.
• 18:31
  SPEAKER_00: Um, so that you know that that would be the issue there.
• 18:34
  SPEAKER_00: I mean, the interpretation of those rules um, you know, by certain people, I would say was loose.
• 18:41
  SPEAKER_00: Yeah.
• 18:42
  SPEAKER_00: It was it was susp, I would say suspicious, they should have been more challenging.
• 18:46
  SPEAKER_03: Yeah.
• 18:46
  SPEAKER_00: A lot more challenging.
• 18:47
  SPEAKER_03: And just to your passing comment on the ACD or MANCO, what role and responsibilities do they have to ensure that correct governance?
• 18:56
  SPEAKER_00: You know, well, the ACD uh and the um and the equivalent in Dublin, Luxembourg as a management company, Manco, they represent the shelters.
• 19:05
  SPEAKER_00: That's their first job.
• 19:07
  SPEAKER_02: Right.
• 19:07
  SPEAKER_00: So if a fund manager is not behaving, um if they're not adhering to the rules, or they are uh playing lip service to certain elements, too, such as you know the SPV example with Woodford, they they have the right and the responsibility and accountability to fire the fund manager.
• 19:26
  SPEAKER_00: Now the challenge, and this is where it becomes a bit of a challenge, a bit of a dilemma.
• 19:31
  SPEAKER_00: If if you're working at BlackRock, who are very, very good company, you know, one of the largest businesses, if a fund manager misbehaves, that fund manager will be fired.
• 19:42
  SPEAKER_00: Because he's yeah, he or she has breached all the rules and there's there's all the procedures they go through, and that fund manager would be let go.
• 19:49
  SPEAKER_00: And we have seen examples of that across the industry where fund managers have breached and they've been fired.
• 19:53
  SPEAKER_02: Yeah.
• 19:54
  SPEAKER_00: Absolutely so.
• 19:55
  SPEAKER_00: How could Neil Woodford fire himself?
• 19:58
  SPEAKER_00: Yeah.
• 19:59
  SPEAKER_00: So you you you can't do it.
• 20:01
  SPEAKER_00: And if you're be it link or whoever, you have a conflict because you've got a relationship with a fund manager who's got£10 billion worth of assets on your books.
• 20:11
  SPEAKER_00: The sales team at the ACD are going, happy days, I'm off on my skiing vacation shortly on that on the bonus on that one.
• 20:19
  SPEAKER_00: But you're gonna challenge the fund manager and say, you can't do this, or we're gonna fire you.
• 20:24
  SPEAKER_00: You're not gonna fire Woodford.
• 20:25
  SPEAKER_02: Yeah.
• 20:26
  SPEAKER_00: So there is a significant conflict.
• 20:28
  SPEAKER_00: But if there are strict rules which says you cannot do this, it is there in black and white, then Woodford or whoever has got nowhere to hide.
• 20:38
  SPEAKER_00: And the problem was it was interpretation of the rules, where if you're allowed to have that sort of flexibility, it's wrong.
• 20:45
  SPEAKER_00: Whereas the 51040 is so written in stone, you you have an inadvertent or you get an inadvertent or an advertent breach.
• 20:53
  SPEAKER_00: So, for example, some portfolio managers, and I'm sure you know people listening to this podcast have got managers who do exactly this, they go to 9.9% on an individual stock because they're running it.
• 21:02
  SPEAKER_00: They're thinking this is a great stock, I'm gonna run this.
• 21:04
  SPEAKER_00: And of course, the stock but goes up 20% the next day, and suddenly you're over 10%.
• 21:09
  SPEAKER_00: That's an inadvertent breach.
• 21:10
  SPEAKER_00: Yeah, if however he's at 9.9 and he buys another two, he or she buys another 2%, that's an advertent breach.
• 21:16
  SPEAKER_02: Right.
• 21:17
  SPEAKER_00: And he he or she needs to sell that back.
• 21:20
  SPEAKER_00: Uh again, I've got issues there, they're allowed up to six months.
• 21:23
  SPEAKER_00: I think they should be allowed six days.
• 21:25
  SPEAKER_00: You know, they've breached, they've got to sell straight away.
• 21:27
  SPEAKER_00: And we do that.
• 21:28
  SPEAKER_00: As an a manco, that's exactly what we pick the phone up and say, sorry, you've got to sell that stock.
• 21:33
  SPEAKER_03: So cheeky question then.
• 21:34
  SPEAKER_03: So have you ever challenged or moved a fund manager on for not adhering to the rules?
• 21:42
  SPEAKER_00: Uh yes and yes.
• 21:43
  SPEAKER_00: Um, yeah, we've um uh we've challenged managers who bought illiquid.
• 21:49
  SPEAKER_00: Um again, the SBV comes up all the time.
• 21:51
  SPEAKER_00: There's a particular manager bought SBV, it was a German property fund, uh which for those who know about property funds, they are illiquid.
• 22:00
  SPEAKER_00: Um, even and again, frustratingly, you see uh property funds in a UCIS structure.
• 22:06
  SPEAKER_00: I'm not a great believer, bricks and mortar are not liquid.
• 22:08
  SPEAKER_00: And he bought this, and as soon as we spotted it, we go, Well, no, that's and he said, Well, hang on, it's an SPV.
• 22:14
  SPEAKER_00: And we just said, No, we're not comfortable with that.
• 22:16
  SPEAKER_00: We as a board are not comfortable with that, you need to sell that down.
• 22:19
  SPEAKER_03: So you need to be able to have teeth in that and that relationship, yeah.
• 22:22
  SPEAKER_03: Yeah.
• 22:22
  SPEAKER_00: And ultimately, we can we can turn around to that particular manager and say, Well, if you don't like it, you know, jog on.
• 22:28
  SPEAKER_00: Now, as it happened, uh, we are going through a situation at the moment where we're merging, we're moving a fund manager from a particular portfolio.
• 22:35
  SPEAKER_00: One, because we're not happy with the performance, two, we're not happy with the way the fund has been run.
• 22:39
  SPEAKER_00: And thirdly, I don't think the fund manager cares anymore, to be honest.
• 22:43
  SPEAKER_00: And so it was a case of you either move or we move it for you.
• 22:47
  SPEAKER_00: Um, they've you know they're moving on.
• 22:49
  SPEAKER_00: Um, and uh, do I get any satisfaction?
• 22:52
  SPEAKER_00: Not at all.
• 22:53
  SPEAKER_00: Um, it's a it's a damn shame.
• 22:54
  SPEAKER_00: But fund managers they're not gods.
• 22:57
  SPEAKER_00: I mean, some people hold them up in high esteem, and we do live in a culture of star managers, which I find a little bit frustrating.
• 23:03
  SPEAKER_03: It reinforces it, doesn't it?
• 23:04
  SPEAKER_00: It does, and I think if you've you know with someone like Woodford, you just you you're not gonna challenge him.
• 23:09
  SPEAKER_00: And um, you know, we need to avoid that.
• 23:11
  SPEAKER_00: We need to avoid that.
• 23:12
  SPEAKER_03: So it's interesting that it's so much more part of our daily dialogues and and our roles.
• 23:18
  SPEAKER_03: So I guess looking forward, you know, what's changed since Woodford, even though it's sort of relatively near-term history, um, so that it doesn't happen again, and that we can kind of preserve the trust in the industry for investors.
• 23:33
  SPEAKER_00: Well, there's things that have been brought in in recent times, which will help, but they're still in the world.
• 23:39
  SPEAKER_03: The SMCI.
• 23:40
  SPEAKER_00: The SMCR is the main thing that's coming.
• 23:42
  SPEAKER_00: That's that's created that individual accountability.
• 23:44
  SPEAKER_00: So we've basically gone back 40 years, um, which you know is is as nothing's new under the sun.
• 23:51
  SPEAKER_00: We just go around in a big circle, and there we've gone back to individual accountability.
• 23:55
  SPEAKER_00: So there'll be there are individuals, so you've got the FCA register now, you will and you look at a company, you will have the um SMF, so senior management function.
• 24:04
  SPEAKER_00: So I'm a SMF uh one, three, and ten or something.
• 24:08
  SPEAKER_00: It was basically means you've got the different roles and responsibilities within the UK company.
• 24:12
  SPEAKER_00: Yeah, within the Irish company, you would have the designated function, designated person.
• 24:16
  SPEAKER_00: So the SMCR has been great for that because it has forced businesses to look at what they're actually doing, and it's not just a job.
• 24:25
  SPEAKER_00: So senior, it's it's all about the senior management.
• 24:27
  SPEAKER_00: The senior management have to be accountable for the running of the business.
• 24:31
  SPEAKER_00: They can't just say, well, it was him or it was her or it was them over there.
• 24:35
  SPEAKER_00: No, you are responsible.
• 24:36
  SPEAKER_00: What happened on your watch?
• 24:38
  SPEAKER_00: So that's been really important.
• 24:39
  SPEAKER_00: But they're also what we've got to move forward in certain areas, such as, you know, I can't hesitate, I can't um you know stop myself saying it again, which is about having absolutely defined rules and uh within the running of a portfolio.
• 24:53
  SPEAKER_00: So if it says X in the prospectus or the supplement, then that's it.
• 24:59
  SPEAKER_00: You don't interpret that.
• 25:00
  SPEAKER_00: That's a hard, fast rule.
• 25:02
  SPEAKER_00: So if it says no SBBs or no illiquid assets, and you know, private equity, in the case of Woodford, isn't a liquid asset, absolutely not.
• 25:10
  SPEAKER_00: Bricks and mortar, absolutely not.
• 25:12
  SPEAKER_00: The AIC has made absolute hay over the last yeah six months of the sunshine they've had with Woodford.
• 25:18
  SPEAKER_00: And I think people over there, absolutely so.
• 25:22
  SPEAKER_00: Um forgetting the gearing issues, but yeah, investment trusts are perfect for illiquid assets.
• 25:30
  SPEAKER_00: Open-ended vehicles are not good for liquid assets.
• 25:33
  SPEAKER_00: But that aside, if we are we're gonna go forward with UCITs and open investment companies investing in illiquid assets, we're gonna have another Woodford, we're gonna have another situation like this going forward.
• 25:45
  SPEAKER_00: So we need to change that, and that's a regulatory change.
• 25:48
  SPEAKER_00: That means that hopefully, and we're in this bit of a quandary at the moment between uh because of Brexit as to what the rules are and USITs, hopefully, because it's run by business people, the the two elements, i.e., the European ESMA and the FCA will come together and say, right, the UK version of the UCIT is exactly the same version of the European one.
• 26:11
  SPEAKER_00: So we'll we'll interpret that and the ESMA is is forcing through this illiquid issue.
• 26:15
  SPEAKER_00: So we'll adopt those parameters and rules within the UCIT.
• 26:20
  SPEAKER_00: And if that is the case, then happy days.
• 26:22
  SPEAKER_00: But we're in a bit of a quandary at the moment for the next uh certainly the next 18 months until we get those those rules brought in.
• 26:30
  SPEAKER_00: Once that's in place, then that'd be great.
• 26:31
  SPEAKER_00: We we can avoid that.
• 26:33
  SPEAKER_00: But I can't emphasize enough those responsibilities step from within.
• 26:38
  SPEAKER_00: It's all very well the regulator telling you one thing, and that's a hard rule, but it's really dependent on individuals within the government within the companies to monitor and measure and to challenge.
• 26:49
  SPEAKER_00: Don't just rely on the senior manager, people at all levels have that responsibility.
• 26:54
  SPEAKER_00: They see stuff going on, they should report it.
• 26:57
  SPEAKER_03: Go ahead.
• 26:58
  SPEAKER_03: And actually, that that sort of leads me to my final question, really, which would be: what's the the proactive role that marketers can take in this?
• 27:09
  SPEAKER_03: Because, as we know, these sorts of incidents with Woodford, you know, come off badly for the whole industry and sort of deteriorates the sort of trust that we have as an industry in the way that we are governing ourselves and delivering for investors.
• 27:25
  SPEAKER_03: Um, and and also the impact on brands, a catastrophic impact on on the brand for companies and the brand for the industry.
• 27:34
  SPEAKER_00: Well, there's a number of number of points, uh Twink, and and that that last point is critical because if the business is damaged as a result, that marketing person may well be out of a job because the company goes bust or has to uh retrench because assets are flying out of the door.
• 27:50
  SPEAKER_00: So you have an accountability to your own to yourself as much as anybody else.
• 27:54
  SPEAKER_00: Hi, do you want that job going forward?
• 27:56
  SPEAKER_00: So that that's it's a small point, but it's actually quite an important point because you are protecting yourself as much as you're protecting the business.
• 28:03
  SPEAKER_00: So if you're going to be accountable, be accountable to yourself first and secondly to the company.
• 28:07
  SPEAKER_00: Um, I think on the issue is um as far as uh what the marketing team and individuals within the business can do, yes, I think it is a case of just don't take things as red.
• 28:21
  SPEAKER_03: Yeah.
• 28:21
  SPEAKER_00: If someone if a fund manager puts in front of you something, be it uh an overview on markets or an overview on the fund, just ask the question.
• 28:31
  SPEAKER_00: Be curious.
• 28:31
  SPEAKER_00: Yeah, be curious.
• 28:32
  SPEAKER_00: What does that mean?
• 28:33
  SPEAKER_00: What do you mean by that?
• 28:34
  SPEAKER_00: What what what's what does that mean for the fund going forward?
• 28:38
  SPEAKER_00: And I think that's really important.
• 28:39
  SPEAKER_00: And then secondly, I think um those with obviously a year or two's experience wouldn't be expected, but I think those people who've got five years plus experience should be sitting in a governance role within the organization and should put themselves forward to say, look, I know what I'm talking about here, I need to sit on the oversight committee here, be it on the investment risk, investment management, and so on.
• 29:03
  SPEAKER_00: And and again, it's probably a very small point, but a lot of marketing people I've worked with over the years might go and do the IMC.
• 29:11
  SPEAKER_00: Go and do the CFA.
• 29:13
  SPEAKER_00: It's a hell of a challenge, it's a very tough one.
• 29:17
  SPEAKER_00: But don't just do marketing um training, do investment training.
• 29:21
  SPEAKER_00: So get the qualifications so that when you're sitting opposite a fund manager, you can understand what they're talking about.
• 29:27
  SPEAKER_03: Terrific.
• 29:27
  SPEAKER_03: Well, thank you, Stuart, so much for having such an open, uh, you know, far-reaching conversation and for your candour in it and wishing you all the onward success with Gemini.
• 29:38
  SPEAKER_00: Thank you, Twing.
• 29:39
  SPEAKER_00: Pleasure to have been here.