The investment world can be full of surprises. On the other hand, you could say that nothing really changes in the financial world – only the names and nature of the securities involved are different. This is certainly true of financial scandals, of which there have been quite a few during my career.
It is more than 56 years since I first stepped out of a train at Liverpool Street Station to start work as a contracts clerk in a firm of leading stockbrokers. Then the firms were partnerships, the functions they provided clearly divided into two – brokers (dealing with clients) and jobbers, which dealt with the brokers. The stock exchange was fragmented, London dominating, but regional cities having their own exchanges, while brokers located in smaller, provincial towns had their own Provincial Brokers Stock Exchange – arguably a forerunner of the virtual exchange that exists in London today.
The terms “Wealth Manager” and “Independent Financial Adviser” were unheard of then. Wealthy private investors might have their portfolios looked after by a merchant bank, although brokers were getting into the business of providing an ongoing management service, rather than just acting as the conduit through which shares were bought. Those with less means would probably be buying an insurance product from an insurance salesman. I know many IFAs who started out this way.
In January 1964 I had the good fortune to be posted by my firm to the floor of the London Stock Exchange as an unauthorised clerk – or bluebutton as they were known because of the colour of the badge they wore to denote the firm for which they worked. Our job was to run messages for the dealers and members of our firms. We could check share prices but were not authorised to deal – hence the job title. I was 18 when I started, nervous because of the overpowering feel of the trading floor. And at the end of my first week as a bluebutton, a member firm was “hammered”.
This practice was to draw to the attention of those present in the Stock Exchange that a firm of brokers was unable to meet its financial obligations. In other words, it was bust. The term “hammered” was because the announcement was made by one of the Exchanges Waiters (as these servants of the London Stock Exchange were called in deference to its origins as a coffee house in which share trading took place) by bringing down a gavel from one of the podiums on the floor. The noise was guaranteed to bring an instant hush to what was usually a very noisy workplace.
I mention this as probably the first experience I had of something going wrong in the financial world. Plenty of other examples were to arise during my long career. Just a few years later the collapse of Bernie Cornfeld’s IOS group precipitated the first bear market I experienced. The scandal of Norton Warburg occurred when I was investment director of one of the first new breed of wealth management firms – though we called it financial management at the time. This was important to us as, on the face of it, our business models were similar and they were in the spotlight because of clients like Pink Floyd and Bank of England pensioners.
Barlow Clowes followed soon after, while the fall from grace of star fund manager Peter Young gave me my first scoop as an investment commentator on the airwaves. Not all these financial failures were the consequence of fraud. Some demonstrated poor business management or, in some cases, simply a lack of understanding of the issues involved. Arguably the failure of many split capital investment trusts nearly two decades ago falls into this category. The similarity between them all is that investors faced losing money.
In recent times, the problems that faced Neil Woodford highlights another issue that can create difficulties for investors. In order to enhance performance, he concentrated a lot of his firepower in unquoted and smaller companies where he became a major shareholder. Arguably this is not good practice for an open-ended fund as meeting redemptions can prove tricky, as proved to be the case.
While a closed-ended investment trust can be a suitable investment vehicle for less liquid asset classes, in the particular case of Woodford, the extent of common holdings between the closed and open-ended funds placed pressure on the investment trust because of selling depressing share values of these companies and a perception that the board was insufficiently independent.
I have mentioned before that investors today are fortunate in having access to a variety of asset classes that simply were not available when I started out in investment management. Or, if they were, it was only to the wealthiest in society. Private equity, infrastructure, property, hedge funds, venture capital – all are available in some measure through a variety of vehicles to pretty much any investor, though whether it is wise for many to venture off the well beaten path of equities and bonds is debatable.
But not all asset classes are suitable for an open-ended approach. Along with private equity and venture capital, property springs to mind – or, at least, physical property. Many years ago, a leading fund management house – still around today, though in a different form – launched a residential property unit trust. Meeting redemptions proved to be a problem so, guess what, redemptions were suspended. It pays to check the liquidity constraints of an open-ended fund before committing clients’ money.
Brian Tora is a consultant to investment managers, JM Finn.