A good industry, but we can do better

'Regulators and government need to think more holistically about the motivation for regulation'

What’s good?
There is a fundamentally societally useful function that fund managers provide in a capitalist economy. The stock market is the place where risk is managed and absorbed in a capitalist economy and the act of providing capital itself to facilitate growth in enterprises brings employment and wealth benefits to the economy. Where we are operating at our best is in an active scenario where we decide where to allocate capital and where companies that are destroying value, we remove capital from those companies. Capital is recycled to areas for a greater return for employment and the economy.

What about the fact that we generally operate in the secondary market?
There’s a primary and secondary role. Retaining earnings in the business itself is an allocation of capital. If the market held businesses where it had lost trust in the management it would demand the repatriation of capital to shareholders. People lose sight of the fact that there is a capital allocation going on. Retained earnings are a source of funds for businesses, outside of specific capital raising events companies are using equity capital in their businesses.

Are we doing well?
Not well enough: part of the reason that we don’t do well enough is because of the complexity that has been laid on to that quite simple function of taking savings and investing them on behalf of people. All of those involved in the process have added layers of complexity to fee structures that have diluted returns that should find their way back to the providers of capital.

How can we counter this?
Regulators and government need to think more holistically about the motivation for regulation. Have we moved too far from trusting people’s judgment? Lay investors need to be protected but I’m not sure whether we have created a system that would protect them any better than the system that existed when I started doing this. We have created structural inefficiencies. Parts of regulation have created unintended and harmful consequences. Appropriate risk and returns are what clients look to their investments to deliver. My approach is guided by the asset class that most interests me, which is equities. The equity asset class and the role it can fulfil for investors have been undervalued by the establishment, by regulators, by fashion and government. It has been disproportionately disadvantaged by tax treatment, for instance. Our industry has been extremely adept at creating a mystery. What we would like to move to is a system where the difference between the gross and net return for the investor is the amount we charge for doing the job we do.

CFA UK put these questions to Neil Woodford

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