Myths of star investors

THE cult of personality in fund management is relatively new. The people managing our assets historically were hidden in the back rooms of big investment firms, subservient to the star dealmakers and traders.

Perhaps inevitably in an age of celebrity, those who put up the best performances emerged from the shadows essentially as a marketing device.

In the manner of Premier League footballers, they started to believe in their own myths and felt justified in earning huge fees. It is no accident that Neil Woodford and a close colleague, Craig Newman, extracted £96.8m in dividends and profits from the company that owns the funds they ran over the last four years.

If Woodford had been true to his own investment strategy of picking unloved and unlisted shares for the long-term, he would not have been so quick to take extraordinary gains. This is money which could have been used to waive charges for locked-in savers.

In a world where investments are accounted in the billions not millions, the income could be regarded as small change. But not for the tens of thousands of small investors, lured into Woodford funds by investment platform Hargreaves Lansdown and upmarket advisers St James’s Place – both FTSE 100 companies in their own right – this is very painful.

In the early 1970s the greatest fund manager of the time, Sir Denys Lowson, former Lord Mayor of London, was discovered to be bolstering the values of the trusts he managed through a complex web of crossholdings which disguised that underlying investments were near worthless.

Lowson was drummed out of the City and the trusts were wound up.

In my mind, the lesson of that event always has been: beware of funds that invest in each other. Hargreaves Lansdown offers clients (including this writer) a secure, lowcost investment platform which has literally hundreds of trusts to choose from. What it should not have been doing is repackaging Woodford Equity Income and other funds into six of its own Multi-Manager investment packages.

The reputational damage from both its recommendations of Woodford funds and deployment of them in crossholdings could be immense.

St James’s Place, known for harvesting savers through posh cocktail parties, also deserves opprobrium. That the investors should end up in a Woodford fund, via a St James’s Place wrapper, is unfortunate.

If it is any comfort to those who have fallen under the Woodford spell, he is not the first celebrated manager to have over-reached.

Anthony Bolton earned a stellar reputation as manager for 28 years at Fidelity’s flagship Special Situations fund. It all turned to grief when he sought to pull off the same trick in China.

Bill Gross was feted at Pimco as the ‘bond king’ for his control over the world’s largest bond mutual fund, which had $293bn in assets at its height. After a row he joined Janus and at the end of his tenure his flagship fund controlled less than $1bn.

The trigger for Woodford being required to freeze his equity income fund was the effort by Kent County Council to redeem £238m.

By acting precipitously it has made life hell for tens of thousands of much smaller savers who are trapped inside, and investors in Woodford’s quoted Patient Capital, where the shares tanked 7.2pc yesterday. Investors in Woodford funds should have better understood what they were buying. Short-term gains are nice but Woodford has a strategy which involves spotting unrealised long-term value and backing unlisted companies. There have been terrible calls, such as Non-Standard Finance (NSF) and builder Keir.

There now has to be some kind of fire sale of holdings for liquidity to be restored and redemptions honoured.

That is a bad outcome fomented by investor panic and short-term thinking.

Provvy saved

THE collapse of the takeover by NonStandard Finance for Provident Financial was all but inevitable. The fact that NSF chief executive John van Kuffeler and his Dad’s Army could not muster support in the City beyond the original backers, including Neil Woodford, doomed the bid.

The Prudential Regulation Authority, the Bank of England enforcer, was very nervous that Provident’s authorised banking arm, Vanquis, would have ended up in unstable hands had the deal proceeded with so many investors opposed.

Never has so much money been wasted on advisory fees for a transaction involving the most vulnerable borrowers in Britain.

Scandalous.