aul Stephany, a fund manager formerly with Newton, was fined £32,000 last week by the Financial Conduct Authority for misconduct and kicked out of the asset management group for doing what most people would have thought was part of his job.
Before then he had been a good performer, was highly regarded and was running four funds worth almost £2 billion. His case related to the London float of holidays firm On the Beach, on which Numis Securities was the bookrunner. This was in 2015. It has taken most of this time for the FCA to assemble its case.
Being a bookrunner is a marketing process in which Numis discusses the appetite for the chosen share, in this case OTB, and its potential valuation with the market. Then it agrees on a price range, say 120p to 150p, and tries to find buyers near the top of the range, though usually supply and demand will be at a lower price. The shares are then struck at the highest price which more than covers the issue and a few days later they become listed.
Stephany was one of those who was approached by Numis to discuss and then to buy the shares. He decided the issue was overpriced. He sent an email to 14 other fund managers to see what their reaction was. He thought the share price should be at the low end of the range and he wondered whether those contacted might feel the same.
I thought this was what fund managers do. Brokers try to sell them shares at a high price and fund managers push back, hoping to get them lower. It does not always work but it is part and parcel of the ritual and it helps the fund if it works because the clients who are in the fund get the shares that much cheaper. The individual fund manager does not benefit, just his fund.
That is certainly how the market used to work. Now, however, it is different. Now investors are not allowed to discuss new issues, or IPOs, with competitors, because to do so, apparently, could lead to the perception of collusion. Instead fund managers have to keep their own counsel and decide only for themselves what price they offer. Otherwise they might all decide to lowball a bid and the bookrunner would be very put out.
Deciding on the merits of a share issue is not to my mind collusion, where there is a formal intent for several parties to set a price. Collusion is also difficult to prove. But not for the authorities. To them, Stephany was bang to rights.
But it still does not make sense in the wider context. IPOs have had a chequered history in recent times. With bookrunners like Goldman Sachs, shares were allocated to hedge funds rather than mainstream fund managers. These hedge funds simply took a turn, selling their shares within days.
Institutions, if they were gullible, bought the shares, and they tended to be gullible because they did not have other people to bounce their ideas against, but had to rely on what the bookrunner wanted them to know. Then the price would often tank, leaving the institution with heavy losses.
But this apparently is OK: the Competition and Markets Authority among others said the market was working well, which it was for the bookrunner. The result is fund managers are much more chary of IPOs, and there is a dearth of them, not because the companies are bad necessarily, but because the shares are often overpriced. Some would say this is hardly good regulation.
The other thought is the role of active fund management. It is going through a torrid time, largely because so many people are switching to tracker funds. Active funds have to differentiate themselves to stand out from the crowd, but the FCA’s rules and the compliance burden instead seem to make everyone the same, and mediocre.
There is very little the fund manager can do to differentiate by the time he or she has met the strictures on shares, the needs of the client and the burden of compliance. To take a punt is not worth it because the FCA and compliance will demand to know why the share was selected, even if it does well. Only the liquid and boring tend to meet the criteria of “acceptability”.
Stephany overegged it. He was probably a bit too arrogant. He was wrong to say what he thought Numis was up to. He was a bit boastful, and dismissive of compliance. But it is a sad day nonetheless, when he gets fired, while other fund managers carry on keeping their noses clean but losing hundreds of thousands of pounds. That is real mediocrity.