RI Interview: Daniel Godfrey. The ousted UK funds body chief building a long-term, sustainable portfolio career

The former Investment Association chief’s mantra is long-term investment, engagement and client focus.

Daniel Godfrey has been busy since being ousted six months ago as CEO of the Investment Association, the trade body for the UK fund management industry, following a spat about a set of client-friendly Principles for asset managers. He’s joined the board of US-based Ethical Capitalism Group, become an advisor for Fintech firm Moneybox and is exploring launching a new investment trust providing what he says is a “truly mutual” structure, although he won’t elaborate. He is also a Non Executive Director of Big Issue Invest, the social investment arm of The Big Issue magazine for the homeless.
His new portfolio career is eating the cooking that got him removed from his £532,595 role as CEO of the IA when a number of fund managers, notably Schroders and M&G, threatened to quit the organisation, ostensibly over the Principles backed by the board and lead by Godfrey to commit them to clients’ interests and enshrine investment stewardship. Godfrey declines to comment. Industry sources say the contention centred on whether the Principles would lead to reform of the perennial problem of bundled fee structures for broker research and execution that have remained because of the corporate access and IPO allocations that investment banks line up for fund managers. Ironically, the UK Financial Conduct Authority has done for the first, and the latter will likely be ironed out by MIFID II. Either way, Godfrey took the fall – perhaps unsurprisingly – for an industry split about how far it is the role of an ‘industry association’ to be ‘responsible’ for promoting client interests.
A trace of Godfrey remains at the IA: the Investor Forum, designed to promote long-term thinking throughout the financial chain through collective engagement, where he is still a non-executive Director. The Forum, housed and funded by the IA for an initial 3 years, recently got financial backing from 19 institutional investors and is now independent, although it remains in the IA’s building.It’s already carried out a dozen engagements with companies and could become a serious collaborative engagement force with the new backing. Godfrey is passionate about long-term finance. Its absence in corporate culture, he says, causes many problems such as a lack of innovation and shaky workforce development: “Investment managers really need to embed it within their own culture to give companies the permission to think longer term,” he says.
“That’s why when I was at the Investment Association I set up the Investor Forum to promote long-term thinking throughout the investment chain and address companies collectively when things seemed to be going wrong because of short-term thinking.”
One example he gives is corporate lobbying. “Companies make big contributions to political campaigns, and they do that because they want to get political influence, and that might be good for the company in the short term. But, an individual’s future depends not just on the returns of one company, but many companies. This unfair competitive advantage is a less than zero sum game. As your financial representatives investment managers should be working their way towards promoting fair competition. How do they prevent or require companies to abandon the dark arts of corporate lobbying?”
He suggests the investment industry has not done a good enough job on the issue because it lacks the commitment to engage effectively.
“The asset owner is the client, but they’ve been doing the engagement directly because they haven’t really trusted the fund manager to do the job. We need to sort that out because I think detaching this buy/sell decision from engagement actually downgrades the importance of engagement and the impact it can have, because the board, the people in the companies can just think this person is just coming to complain, but actually the person who is buying the share

doesn’t care about this.” He insists that engagement should be done by whoever is doing the buy/sell decision, generally the investment managers: “Institutional investors and retail investors need to make it clear to fund managers that this is something they regard as very important. Not only because it is the right thing to do. Because if investors help make companies better, it raises all ships. It benefits the whole economy as well as the individual investors whose money it is.”
RI asks if the increasing shift away from active fund management to passive could be bad for engagement and stewardship.
Godfrey says it doesn’t have to be. On passive management, he says: “In one way they have the biggest responsibility to try and improve beta because it benefits their clients. I’d point to Legal & General, a passive house, that is one of the best in terms of how they engage.”
On active fund management, he highlights how it can lead to perverse engagement through slavishly tracking an index. “If you are an active manager running a fund that has an objective of outperforming an index, the likelihood is that you don’t have the incentive to engage really heavily where that stock is underweight. Perversely, if the impact of your engagement with an underweight stock is that it outperforms, then it helps your competition.
“Now that shouldn’t really matter, as your first responsibility is to your client: if you can help them get an absolute return that’s a good thing. I suppose there’s a question of whether the whole fundamental basis of managing active equity against an indexed benchmark really makes sense at all.”
He continues: “Why do we think that the FTSE All Share or the S&P 500 is the best proxy for what you need over the next 30 or 40 years. We know that most of the companies that are in the FTSE100 today won’t be in 20 years time. So if you are only investing in the FTSE100 you are going miss the companies that will come into it, when they are going through their best growth phase and you are going to be invested in all the ones that crash outof it, as they fall out. And the other thing is you are kind of dependent on the London Stock Exchange’s IPO policies. So if it is the fashion for Eastern European natural resource companies, you’ll start getting a big chunk of that in your portfolio, just because you are following an index.” He says proper active investment management should be about identifying companies with great strategies and management, and backing them for the long term. “The pressure from passive could polarise the industry into passive on the one hand; and high conviction, low turnover active on the other, maybe with smart beta in between,” he concludes.
Godfrey is also focused on long-term investment in the US. Ethical Capitalism Group is a nascent initiative working with investors and fund managers to promote long-term positive change at US corporations and led by former investment manager Katherine Venice.
He sits on the advisory board alongside Anna Burger, former Secretary Treasurer of the Services Employees International Union and Amir Dossal a 25-year veteran of the United Nations and founder and Chairman of the Global Partnerships Forum.
He describes the company as an antidote to short term activists who “recognise there is a problem and want to solve it with things that will provide a short-term pop”.
“We want to work with shareholders and management boards to develop long term strategies,” he says. “In a very US way it is trying to be the representative of Main Street on Wall Street.”
Moneybox, where Godfrey is on the advisory board, is a mobile phone based, low cost investment saving platform, via a UK ISA (Individuals Savings Account) retail fund, aimed at millennials. It nudges people to add amounts to their savings funds – from a range of three index funds – when they are paying for other items such as coffee or travel.
Having tried the route of moral suasion with the fund managers of the IA, Godfrey is now building a portfolio of sustainable entrepreneurial gigs to shoot for the same goals.

With additional reporting by Hugh Wheelan