Until recently, David McCann, a research analyst at Numis, the influential UK brokerage, was a respected but little-known figure in the City of London.
The spat that ensued became a battle of David and Goliath proportions between Aim-listed Numis and FTSE 100 heavyweight Schroders. Several industry insiders hailed Mr McCann for daring to challenge his larger peer, and his intervention was seen as all the more audacious since Schroders is an important client for Numis.
“Well done Numis,” said one FT reader of the report. “Respect to Numis for speaking out about this,” added another. But Mr McCann, an accountant by training who has worked at Numis for the past decade, is keen to dispel heroic comparisons.
Speaking to FTfm from his office overlooking St Paul’s Cathedral in London, he says: “I didn’t want that note to be seen in such a confrontational way, because David versus Goliath summons up images of war or battle. It really was not supposed to be that. It was supposed to raise what I thought was a legitimate point around the whole sector.”
The point in question erupted soon after Schroders released its quarterly results in March, when it claimed 85 per cent of its assets outperformed their benchmark or peer group over the past five years. After lengthy probing, Mr McCann discovered these figures only referred to a chunk of Schroders’ total assets, and did not take fees — one of the biggest detractors from investment performance — into account.
One day after Schroders’ results were released, Mr McCann sent his unusually combative note to his contacts. Schroders, he said, had published “disingenuous” figures that flattered the performance record of its funds. At best, only 54 per cent of the company’s assets could have outperformed, and, as the UK market leader, the fund house ought to have made that clearer.
Schroders rebutted the criticisms as unfair, highlighting that other fund companies reported in a similar way. Mr McCann, who was attending a friend’s wedding the day after his note went out, missed some of the festivities in order to field calls with senior colleagues and journalists as news of his research spread like wildfire.
Five tense days after publishing his note, Mr McCann retracted his criticism and publicly apologised to Schroders for the “personalised aspect” of the report. “It was a more challenging weekend than normal,” he says of the period.
Does he regret firing off that email? “In the way it was written, yes, I do regret that and would not have hit the send button. It was obviously very personalised, and the wording probably overstepped the mark in some regards,” he says.
The issue at the heart of the note has not faded from view. Last month Mr McCann published a more detailed report looking at how Schroders and 19 other asset management companies disclose fund performance.
The latest research was not explicitly critical of Schroders, but flagged the company as one of several large asset managers that fails to meet the standards Numis believes should be best practice.
Once again, Mr McCann found he was irking his company’s client base when he started work on the 65-page report. “There was a degree of resistance, should we say, from the industry when putting this together. There are companies who would just rather I wasn’t looking into this at all and would shut up.
“I guess what makes this unusual is that I am effectively writing about Numis’s customers. It is asset managers who buy our research and use our investment banking services.”
The analyst admits the incident has affected his relationship with Schroders. “We are rebuilding,” he says. “It is probably not the kind of relationship it was before March, but we are on speaking terms, and they were helpful in answering questions [while preparing the latest report]. I don’t know what they think of me, but I’d like to think they felt that they were given a fair hearing.”
He believes focusing on controversial issues will help set Numis apart from its competitors at a time of intense pressure for the analyst community. Rules due to come into force next year under Europe’s Mifid II regime will transform how fund managers pay for research from banks and brokerages, potentially putting analyst jobs at risk.
“If you are going to have a differentiated product, occasionally you are going to say things that will upset people,” Mr McCann says. “You can do [bland] research, or you can stick your head above the parapet. I’d far rather be doing that kind of work.”
Mr McCann wants to see more standardised reporting across the industry. At the very least, fund managers should be upfront about limitations to their data, he believes. “It feels like this metric has been taken over by [asset managers’] marketing departments rather than being what I think it should be: a useful [tool] for investors and analysts looking at the health of these companies.”
It remains unclear to what extent his research will have ramifications for the investment market. In April, Alan Miller, a prominent City fund manager, called on the Financial Reporting Council to investigate how asset managers present their performance figures amid concerns that shareholders have been “misled”. The UK accounting watchdog has not yet decided whether to launch a full investigation.
Mr Miller is not alone in his concerns. Mr McCann says a longstanding shareholder in a UK-listed fund house is now questioning everything the company has told him because he previously viewed the performance figures “as gospel”. “They were not aware of just how many limitations went into [these figures]. It makes them really question what the company has been telling them when you take away some of these layers.”
The analyst adds that reliable figures around investment performance are more important than ever as the active fund industry comes under pressure to prove its worth.
Last year, the Financial Conduct Authority issued a damning report on the fund market, criticising active portfolio managers for delivering poor value for money and charging high fees for benchmark-beating returns but essentially copying their index. The watchdog’s final conclusions from its investigation of the industry will be released this month.
Mr McCann says: “The reason we [are pushing for standardised figures] at this juncture is because it is becoming more and more important that we know which active managers are adding value. It is as simple as that.
“I suspect that, overall, most [companies] will not be adding value, unfortunately for the industry, so it is just as important to identify those that do. If you really are adding value, there is no reason this should be a threat to your business.”
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