WHEB Commentary

Building longer term relationships with clients

This article first appeared in the launch edition of the Transparency Times which you can access by clicking here

The Financial Services Industry remains one of the least trusted sectors of the economy around the world[1]. The investing public assumes that financial services industry is out to get rich at their expense, rather than providing an important service to the economy and the needs of savers.

The problem of an asymmetry of information in the agent-principal relationship between investment intermediaries and their clients can be exploited by the agents in the value chain: clients think they are having the wool pulled over their eyes and quite often are.  In the long-run everyone suffers from this situation.  Investment companies suffer from a low-level of client loyalty and relationship longevity is damaged as a result.  This contributes to the pressure on fiduciary clients to use short-term benchmarks to measure performance and the complaint from fund managers of asset-owner short-termism.  In retail markets, many are simply put off investing at all.  Transparency is not a panacea of a solution to the trust problem, but the famous quote form US Supreme Court Justice Louis Brandeis that “Sunlight is the best disinfectant” seems apt in the circumstances.

WHEB Asset Management is a specialist fund management business focussed on a single Sustainable Investment strategy. Our aim is to generate superior returns from global equities by investing in companies providing solutions to some of the most serious environmental and social challenges facing mankind over the coming decades.  Our mission is to advance sustainability and create prosperity through positive impact investments.  With this singular focus, and our objective as a partnership to build a business for the long term, transparency is a subject that is close to our hearts.

We are committed to operating a transparent and accountable business for reasons of both principle and profit.  On principle because we ask our investee companies to operate to certain standards and we therefore believe that we should hold our own business to the same standards.  And we expect to profit because trust is an extremely rare and valuable asset in the financial services industry. If we can foster a deeper relationship with our clients with trust at its core, then this is likely to result in a longer term and more resilient customer base, and hence a more successful and valuable business.

There has been much focus in recent times has been on improving transparency around fund management fees and costs.  We fully support moves to improve fee disclosure, and it feels like improvements have been made over the past few years, and moves are in train to make further advances.  However, fees are not the only part of the investment industry that have historically been opaque and at WHEB we have looked to break new ground in other areas.

There is relatively little independent governance of retail investment funds in the UK.  Funds have trustee boards, but these are typically buried deep within custodian banks and operate in a removed and mechanical fashion.  Having managed OEIC funds for nearly 20 years, I’ve never met a trustee, nor am I aware of any other fund manager meeting one.  So what mechanisms are in place to ensure a fund is managed consistently with the strategy that has been set out to clients?  We have established an independent Investment Advisory Committee staffed with experts in the field which meets with WHEB’s team three times a year, and part of their brief is to challenge whether every holding in the portfolio meets the criteria of providing a ‘Solution to a Sustainability Challenge’ as well scrutinising consistency in the team’s actions with our investment process and philosophy.  We then publish the summary minutes of this meeting which is available for anyone to read on our website.

Most fund managers publish their top ten holdings, but in many cases it is hard to find out exactly what the rest of the portfolio is invested in.  We publish a full list of companies held in the FP WHEB Sustainability Fund on our website, updated three times a year together with a short description for each company explaining why it fits in our investment themes.  We also publish on our monthly factsheet a number of the parameters that clients should expect the fund to adhere to, such as an average holding period. We show the expected value, for example an average holding period of 3 – 5 years, and we show what the actual result has been, 4.9 years in the most recent period.  This kind of transparency works to impose a level of discipline on the investment team to be consistent, whilst not preventing deviation if it is explained.

Our clients are interested in how we act as sustainable and responsible investors, so we are a signatory to the UK Stewardship code and publish a quarterly report detailing our engagement and stewardship activities and our full voting records.  We also publish an annual ‘Impact Report’ in which we measure and report the social and environmental impact of the fund.

Companies we invest in (and some fund structures, for example investment trusts) hold an annual general meeting at which their shareholders have a chance to hold management to account and ask questions in an open and public forum.  This kind of access is typically not open to investors in retail funds. We feel it should be and therefore hold an annual client conference at which all investors in the fund are able to ask questions of the team in an open conference.

For the past three years we have been a signatory to the EUROSIF Transparency Code, which sets out a standard for transparency for fund managers providing sustainable investment strategies.  Only 6 fund managers in the UK meet this benchmark, compared with 50 signatories across Europe.  The requirements proposed by this code are not just relevant to sustainable funds, but could be a model for the broader investment industry.

Some of the initiatives listed above might sound obvious and routine to the man on the street, but for many in the investment industry these are radical moves and are anything but commonplace.  Are there risks from our approach?  Some would argue that we are giving up some of our intellectual property by publishing what we own, but I would say that our IP runs rather deeper than the name and a short description of why we own it.  Perhaps we give competitors and others ammunition to attack us with if we make mistakes.  This is perhaps more difficult.  We don’t expect to get every investment decision right, but we should be confident enough to talk about where investments haven’t worked out the way we hoped they would.  But certainly this is an area where we expect the playing field will steadily level over time if industry standards of transparency start to improve in the way we believe they should.  In our view the need for greater transparency and open-ness relates to the whole investment industry, and not just within for funds that have a focus on sustainable and responsible investments.  From experience we are confident that we have stronger relationships with our clients as a result of being open with them, so we do this from a commercial point of view and expect our business to benefit over the longer term.

[1] Source: 2015 Edelman Trust Barometer.



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