It’s quite rare that financial headlines transcend the boundaries of mainstream media; it’s even rarer, possibly even unheard of, that good financial news makes the leap. Recently there’s been extensive coverage in the press of a story that’s been brewing in the world of financial services for many weeks. The suspension of withdrawals from Woodford Equity Income and the fall from grace of the fund’s manager, Neil Woodford.
If you aren’t familiar with Neil Woodford, he’s what’s known in the business as a star fund manager, or at least he used be. A highly-rated, experienced and successful stock-picker who made his name managing the massively popular, Invesco Perpetual High Income. In 2014, he left Invesco to set up his own fund management company and in recent weeks he’s suffered an extraordinary fall from grace.
Woodford’s stock-picking ability – the very thing that made him so successful - has also resulted in the situation in which he currently finds himself. He’s made some questionable investment decisions, most notably almost breaching the regulatory limit for the amount allowed to be held in unlisted company shares. The continued poor performance of Woodford Equity Income teamed with increasingly concerning coverage in the financial press, has resulted in large withdrawals from investors. The volume of these withdrawals has led to Woodford suspending further withdrawals from the fund.
The official line on the suspension is that it’s intended to protect investors by allowing Woodford time to reposition the fund’s holdings to more liquid investments. In reality, it means that investors are unable to withdraw their money from the fund until the suspension is lifted but are still required to pay ongoing fees of up to 1.7% – something for which Woodford has rightly been strongly condemned.
It’s not rare for successful managers to leave established investment managers and set up on their own. In fact, just this week it’s been announced that another highly regarded fund manager, Alexander Darwall, will leave Jupiter, where he’s spent 19 highly lucrative years managing European equities, to set up his own investment company, Devon Equity Management.
The over-riding reason that managers such as Woodford and Darwall choose to leave their funds behind is autonomy. Most investment houses use committees or benchmarks to restrict managers’ investment decisions. Fund managers who set up their own fund management companies can control their own investment strategies. From the outside, this autonomy appears to have been Woodford’s downfall.
I think it’s important to point out that we don’t avoid independent or small management companies. In fact, a number of our preferred funds are managed by managers who have set up their own companies to enjoy more control over their investment decisions. As with all the funds we recommend, we spend copious amounts of time analysing the funds’ holdings to ensure that they’re suitable for individual clients.
We used to recommend Woodford’s massively successful Invesco Perpetual High Income to clients on a regular basis. When Woodford announced he would leave Invesco, we advised clients to sell their holdings and reinvest elsewhere. Crucially, we didn’t advise them to invest in Woodford Equity Income. Why? Because – as with all fund managers - there was no guarantee that the new fund would perform as well as his past funds.
The Woodford debacle can only be a bad thing for the financial services sector and implications reach much further than damage to Woodford’s reputation. The UK’s largest online stockbroker, Hargreaves Lansdown, is a long-time supporter of Woodford and continued to list his Equity Income fund on its best-buy lists even after concerns emerged about the fund’s holdings. It’s reported that Hargreaves clients held one-third of the fund at the time of the suspension and that it earned more than £41,000,000 in fees from client investments in the fund.
The Financial Conduct Authority – regulator of financial services - has faced questions from MPs on its handling affair and why it didn’t act on questions raised by the financial press. The FCA has announced an investigation into the Woodford affair but once again stands accused of being reactive rather than proactive.
Ultimately, those who suffer the most are the investors. Those who have money tied up in the suspended fund, those who sold their holdings at a loss, and those who have seen the story in the news and decided against investing in case the same thing happens to them.
And what of small, independent financial advice firms which haven’t recommended Woodford’s funds since his departure from Invesco and wouldn’t have touched them with the proverbial bargepole in the six months running up to the suspension of Woodford Equity Income? We’re damaged too, by the actions of the bigger fish further up the financial food chain for which we remain completely blameless. And we’re at the frontline of restoring investor confidence in an industry that only ever seems to be in the news for the wrong reasons.