–55% When are you going to act, Mr Watchdog?
Vultures swoop as shares reel in Woodford crisis He STILL won’t waive fees for his trapped investors Yet regulator who should protect them refuses to oust him
TEN long weeks have passed since t he bubble t hat is Woodford Investment Management began to deflate like a punctured tyre. For most investors in the fund, they have been weeks scarred by a combination of misery, rising anger and a burning sense of injustice.
Sadly, with every passing day and the release of yet more bad news about the shrinking Woodford bubble, the outlook for investors with money tied up in the suspended £3.4 billion flagship Woodford Equity Income fund looks increasingly grim. They are trapped, unlikely to get any money out before December at the earliest, and now face the all-too real prospect of receiving a fraction of what they originally invested.
Last week’s bad news was centred on the fund’s key holding – Burford Capital. Its share price temporarily went into freefall – plunging 65 per cent in 24 hours – in response to a scathing attack on the company’s financial health by US hedge fund Muddy Waters, a company seeking to make money from betting on Burford’s share price falling (and it triumphed).
Although the shares recovered as Burford rebutted Muddy Waters’ allegations, they still ended the week sharply down, heaping yet more woes on Equity Income and its army of investors.
With Woodford frantically raising cash for the day when Equity Income reopens its doors – and most investors run for the hills – it is likely that Burford will not be the only Woodford holding targeted by City vultures looking to make money from a falling share price.
As every day goes by, and Woodford’s position as manager of Equity Income – and of investment trust Woodford Patient Capital – becomes increasingly untenable, two unresolved matters stand out ever more starkly.
First, there is Woodford’s outrageous refusal to turn off the tap when it comes to management charges – a decision that is costing investors £ 65,000 a day (and this is Woodford Investment Management’s own figure). That is £ 455,000 a week and, so far, £4,550,000 since the fund was suspended at the start of June. If the fees remain in force until December, more than £10 million will have been sucked out of investors’ pockets.
Of course Woodford should waive the fees – investors are united on this point as we highlight opposite. But he is not for turning.
On Friday Woodford Investment Management told this newspaper what it has said since June: ‘There is no change on the annual management charge paid to Woodford Investment Management, which continues to cover a range of costs associated with running an actively managed fund. This includes fund management, infrastructure, staff, resource and administration costs.’
Second, the regulator’s role in this sorry affair looks more wretched than ever. Although Andrew Bailey, head of the Financial Conduct Authority, told the Treasury Select Committee in June that Woodford
should consider waiving fees on Equity Income, the regulator has so far done little by way of reprimanding Woodford and nothing whatsoever to help stranded investors. Indeed, if anything, it has attempted to play down the significance of the fund’s suspension. This has been highlighted in the past few days after Ian Sayers, the head of the Association of Investment Companies, published a letter he had sent to the Treasury Select Committee challenging some of the comments Bailey had made at the time about the fund’s suspension.
Bailey told the committee that details of the fund’s right to suspend dealings were ‘clearly set out’ in its prospectus issued in July last year. In other words, Equity Income investors would have been aware – had they read the document – that the fund could be suspended, with their money trapped in it.
But Sayers disputes this. He says
that while the document provides technical information on the rules that apply if a suspension is necessary, it does not spell out at any stage the risk of a fund suspension. And this is despite the prospectus being published when the regulator had put the fund under ‘enhanced monitoring’ for breaching its limit on holding illiquid stocks.
Sayers concludes: ‘It is difficult to see how any ordinary investor would have understood that the fund was likely to be suspended.’ He also says other documents – such as the monthly factsheet published just before the fund was suspended, and the so-called key investor information document that spells out the risks and likely investment returns according to strict criteria laid down by the FCA – made no reference to any risk of suspension.
A number of other people in the City – who have contacted this newspaper in recent days – are even more damning about the regulator’s role in the Woodford debacle. They accuse the watchdog of being ineffective – of fiddling while Rome burns.
One expert said: ‘Not only has the FCA been asleep at the wheel, but it seems blissfully unaware of its own rules that give it the power to remove Woodford as manager of the funds under his wing – Equity Income, Patient Capital and Income Focus.’
The same person, who wishes to remain anonymous but has no interest in bringing down the Woodford empire, says the regulator’s tests f or determining who is fit and proper to work in the City could easily be applied to oust Woodford – as could the principles governing how regulated firms should do business.
The expert explained: ‘Regulated firms must always act with integrity, observe proper standards of market conduct, exercise their duties with great care and treat customers fairly.
‘ On all these levels, you could argue that Woodford has been in breach – whether as a result of exceeding fund limits on exposure to unquoted companies in Equity Income [not acting with great care], Woodford not promptly disclosing personal share dealings in Patient Capital [ not observing proper standards of market conduct] or continuing to charge investors a fee when they want out [not treating customers fairly].’
They believe the best way forward son Equity Income and Patient Capital is for new managers to be appointed who could oversee their orderly winding up – with the proceeds going to investors. Income Focus could also be taken over by a rival but not wound up.
On Friday, we invited the regulator to justify its lethargic response to the Woodford debacle. It said: ‘Ahead of the Treasury Select Committee hearing, Andrew Bailey was fully aware of the facts of the Woodford situation, including having read the prospectus.
‘Further, as shown on the contents page of the prospectus, there is a specific section on suspensions. Therefore we do not agree with the AIC’s interpretation.’ It also told this newspaper that it was in close contact with all parties in the fund’s meltdown and that it continued to monitor the situation closely. On the waiving of fees, it said it had no power to force Woodford Investment Management to scrap its fees on Equity Income, although it reiterated Bailey’s view that waiving the fee would be a good thing to do. Finally, on the likelihood of Woodford being reprimanded or censured in the future, it refused to comment.
While the FCA seems to think it is doing a good job, some beg to differ. Alan Miller, co- founder and chief investment officer of investment firm SCM Direct, says the FCA’s handling of the Woodford debacle highlights the need for the Government to launch an independent ‘root and branch review’ of the regulator.
He believes that the financial interests of investors are being ‘appallingly neglected’ under the current leadership of Bailey – ‘who should now do the honourable thing and resign’.