Woodford knew he was toast as he took savers’ cash, says top investor
After hubris finally catches up with fund boss, our money-making guru reveals the explosive question insiders are asking...
THE founder of one of the City’s top investment firms has launched a scathing attack on Neil Woodford, the star fund manager whose business shut last week, taking the cash of thousands of investors with it.
Peter Hargreaves accuses Woodford of running an investment operation ‘probably inadequate for purpose’, pours doubt on his stockpicking skills, and says he invested in unquoted businesses without sufficient knowledge.
He also believes Woodford refused to bow to pressure to suspend fees on a flagship fund – Equity Income – after it was suspended in June because he ‘knew he was toast and took as much money as he could, anticipating the demise of his business’.
The extraordinary outburst from Hargreaves, who launched investment platform Hargreaves Lansdown from a bedroom in 1981 and oversaw its rise to a FTSE-100 company, comes days after Woodford was deposed as manager of the £2.9 billion Woodford Equity Income fund.
It followed a disastrous performance run and the fund’s suspension in response to a flurry of investor withdrawals that could not be met because Woodford had bought shares he could not sell quickly enough.
Woodford has also quit from distressed investment trust Woodford Patient Capital and is standing down f rom managing his t hird f und, Income Focus. Like Equity Income, it was suspended last week.
It has left Oxford-based Woodford with no choice but to close his business, Woodford Investment Management, that he founded in 2014 after building a reputation as a top manager in the 2000s.
In an exclusive interview with The Mail on Sunday, Hargreaves says: ‘Was he [Woodford] a great stockpicker? With the benefit of hindsight, I am not sure.
‘It appears he didn’t have the knowledge in unquoted companies and rarely a week went by without him being steeped in various problems.
‘ The crux of t he matter was his organisation was probably inadequate for purpose – couldn’t cope with the billions that poured in from investors.’
Hargreaves also claims Woodford’s strategy of buying under- valued stocks no longer worked.
‘He hadn’t recognised the world is significantly different,’ he says.
‘Many cyclical stocks won’t recover – they will gradually fade out of business. The investment scene and world economy is greatly changed.’
Hargreaves Lansdown, where Mr Hargreaves is a shareholder but no longer an employee, could be fined for its role in heavily promoting Woodford Equity Income despite having concerns over its portfolio.
Yesterday, Woodford said he appreciated that many people in the financial industry wished to express their views. He added: ‘I am sorry, and I personally deeply regret the impact events have had on The Mail on Sunday readers who placed their faith in Woodford Investment Management and invested in our funds.’
TOAST. Finito. Goodbye. Whatever way you wish to look at – and describe – the dramatic investment events of the past five days, Neil Woodford’s career as a front- line fund manager is over. Woodford Investment Management is no more. Kaput. Adios. Good riddance. Although the end was swift when it came – like a house of cards collapsing – it had been obvious for months that the 59-year-old Oxfordbased asset manager was living on borrowed time, especially when the dramatic decision was taken in June to suspend dealings in flagship fund Woodford Equity Income.
An investment fund that by then resembled an equity income portfolio in name only. A fund not invested in a portfolio of incomefriendly UK companies as investors would have expected, but one full of illiquid, esoteric junk.
An investment vehicle not fit for purpose, put together by a fund manager out of control, untamed and unchecked (by regulators and internal compliance), and who thought he could walk on water – only to discover like everyone else (OK, almost everyone else) that he couldn’t.
‘The crux of the matter was that his organisation [Woodford Investment Management] was probably inadequate for purpose,’ said Peter Hargreaves, joint founder of fund platform Hargreaves Lansdown that has made millions of pounds of profits backing Woodford from the day he set up in business in 2014 after a successful career with asset manager Invesco Perpetual.
‘With the benefit of hindsight, it couldn’t cope with the billions of pounds that poured in from i nvestors.’ Although Hargreaves remains a big shareholder in Hargreaves Lansdown, he had long stood down as an executive before the fund platform started ramping Woodford Equity Income on its ‘best buy’ lists. ‘Was he a great stock picker?’ continued Hargreaves. ‘Again, with the benefit of hindsight, I am not sure. I believe he was a good top down economist and in the past [at Invesco] he called sectors of the market extremely well. With hindsight, it appears he didn’t have the knowledge in unquoted companies and rarely a week went by without him being steeped in various problems.’ Damning words.
While Woodford showed a smidgin of contrition at the bitter end last week – ‘I personally deeply regret the impact events have had on individuals’ – as first he lost the mandate to keep managing the £2.9 billion Equity Income fund, then stood down as manager of investment trust Patient Capital, it was too little too late.
His army of investors had long rebelled, outraged at not being able to access their nest eggs entrusted to him. Apoplectic over his bloodyminded (and greedy) decision to keep taking a management fee from Equity Income while they fretted over what would happen to their investments.
Daily fees of £ 65,000 sucked from t he value of t heir evershrinking, inaccessible holdings – a sum that most of his investors (those still working, that is) could only dream of earning in 36 months of hard graft.
More than £8.7 million taken in fees from fund investors while Equity Income remained shut – money that investors will never see again. Money probably swilling around the Woodford investment empire as you read this.
Oh, and let’s not forget last week’s suspension of the £253 million Woodford Income Focus – a result of an investor exodus – a fund that Woodford will continue to draw a daily fee of £5,000 from until such time that Link Fund Solutions (the overseer of the fund) finds a replacement manager. Talk about deja vu, groundhog day and all that. Insulting.
From the day Equity Income was suspended, Wealth campaigned for the fees on the fund to be waived. Woodford refused to budge. Last week, Peter Hargreaves said: ‘Again, with the benefit of hindsight, I rather suspect why Woodford didn’t heed your [Wealth’s] plea to waive the management charge was because he knew he was toast and took as much money as he could anticipating the demise of his business.’
On Friday, Woodford said he appreciated that many in the financial services industry wished to express their views. He added: ‘I am sorry, and I personally deeply regret the impact events have had on The Mail on Sunday readers who placed their faith in Woodford I nvestment Management a nd invested in our funds.’
‘The whole thing stinks doesn’t it,’ remarked an irate John Rowlands. He invested more than £20,000 in Woodford Equity Income when the fund launched in June 2014 – and will be lucky if he gets back more than £17,000 once the fund is wound up early next year and proceeds start being paid to investors. He’s also got money in funds managed by Hargreaves Lansdown that have exposure to Equity Income.
‘ Small investors lose out while Woodford is allowed to sail off into the sunset with his millions, apparently scot- free. What a fiasco. What an injustice.’ Incandescent
John, a 74-year-old retired factory worker, was not finished. Speaking from his home in Lichfield, Staffordshire, he went on to criticise Hargreaves Lansdown for relentlessly recommending Woodford on its ‘best buy’ fund list – right up until Equity Income was suspended in June.
He wouldn’t have bought the fund, he said, if it hadn’t been for Hargreaves Lansdown’s aggressive promotion of it ahead of launch – based on Woodford’s successful investment record at Henley-on-Thames-based Invesco Perpetual.
Nor would he have hung on to it if he had been privy to the information that Hargreaves Lansdown had on it in 2017 ( its increased exposure to illiquid stocks), but chose not to disclose to clients.
He also described the regulator overseeing Woodford and the rest of the investment funds industry – the Financial Conduct Authority – as a ‘giant waste of space’.
His is not a lone voice. Investors have universally turned on Woodford, the regulator and those fund platforms (principally Hargreaves Lansdown) which peddled his fund wares. In despair more than in hope. Hung out to dry like smoked mackerel.
In some i nvestors’ eyes ( not mine), Woodford is now a financial pariah. A name, they say, to be muttered in the same breath as the directors of Equitable Life who ran the insurance mutual into the financial ground in the late 1990s, resulting in savage cuts to the value of savers’ pots.
Yes, maybe a little harsh and a little over the top, but understandable.
It must be said a small cabal of financial advisers have (incredibly) remained loyal to Woodford throughout. Just ahead of Link pulling the plug on Woodford’ s management of Equity Income, they took to social media to preen about sharp gains recorded by both Equity Income and Woodford Income Focus on Friday, October 11 – a result of hopes on a Brexit deal and a rise in the value of sterling ( hopes revived again last week).
Then, post Link’s announcement to remove Woodford from the helm of Equity Income, they challenged those who thought the closure of Woodford Investment Management was ‘right’ to put a note in their diary to check the performance of Woodford’s key fund holdings three years from now. Their view is that Woodford had been culled from Equity Income too hastily. No mention, of course, was made of Woodford’ s disastrous foray into unquoted holdings – breaking fund rules in the process. Blinded by the past. Blinded by an unholy allegiance to Brand Woodford – and maybe driven out of business if, as likely, their professional indemnity insurance premiums go through the roof because of material client exposure to Woodford. So, what is LIKELY to happen to the money of investors caught up in the Woodford debacle? What SHOULD happen to those involved in this sorry scandal? And what NEEDS to be done to ensure investors can once again trust the investment industry to look after their financial interests?
WHAT HAPPENS TO INVESTORS NOW? WOODFORD EQUITY INCOME
FOR investors trapped in Equity Income, they can do nothing now but wait for the fund to be wound up and the holdings sold. This is being orchestrated by asset managers BlackRock and Park Hill.
While BlackRock will oversee the sale of Equity Income’s liquid assets – essentially, its stakes in FTSE 100 and FTSE 250 companies – Park Hill will organise the disposal of the unquoted or more illiquid positions.
Link indicates that the first return of investors’ capital is likely to happen at the end of January. Further returns will then be made as the trickier assets are sold.
As for the losses investors are likely to crystallise as a result of this process, they are dependent upon a number of factors – market movements in the weeks ahead, continued fund management fees (no longer paid to Woodford), trading costs and the sale prices that Park Hill will be able to secure for stocks that may attract little buyer interest. Alan Miller is co-founder of wealth manager SCM Direct and a longstanding fund manager in the City. Taking into account all factors, he has analysed Equity Income’s portfolio and believes that investors could eventually expect to get back around 74p per share – compared to the current price of 85p.
The first payment – just over half of the total – will come early next year, but the rest may take a year or more to come through.
This means that someone who had bought into Equity Income at the end of December 2016 may end up losing some 44 per cent of their original investment.
Someone who bought at the end of 2017 may lose more than half their investment. These are only guessestimates, stresses Miller, but based on sound portfolio analysis.
WOODFORD INCOME FOCUS
ALTHOUGH this fund was suspended four days ago as investors sought to get their money out in response to Woodford’s removal from the helm of Equity Income (and his decision to shut Woodford Investment Management), prospects for trapped investors are cheerier than for compatriots holed up in Equity Income.
This is because the fund’s portfolio is more liquid than Equity Income – it has little exposure to unquoted or illiquid stocks.
Indeed, Income Focus’s portfolio, primarily invested in FTSE 100 and FTSE 250 stocks, is the fund Equity Income should have been if Woodford had stayed true to the princi
ples that served him so well at Invesco Perpetual.
While trapped investors will be annoyed that Woodford continues to draw £5,000 of daily fees from Income Focus, his involvement will be short-lived.
The fund could soon be wound up and cash returned to investors – or more likely it will be taken over by a rival asset manager in the coming weeks. An update is expected from Link before the end of the month.
WOODFORD PATIENT CAPITAL
UNLIKE sister funds Equity Income and Income Focus, this investment trust remains ‘open’. This is because it is a company (an investment trust) listed on the London Stock Exchange and its shares can be traded by investors.
Yet, Patient Capital, with a market capitalisation of £300 million, is not without its major issues. Its shares are currently trading at 33p – compared to £1 when it made its stock market debut in April 2015 – and its portfolio is awash with unquoted companies of questionable value.
Some of these companies are also held in Equity Income where Park Hill has been given a mandate by Link to dispose of them. This is likely to result in the value of Patient Capital’s assets being dragged down further.
It also has £111 million of borrowings that could need to be repaid early next year if the trust’s position does not improve. This would leave Patient Capital in a perilous position.
Alan Brierley, investment trust analyst at Investec, believes the trust’s shares are a firm ‘sell’.
On Friday, he told Wealth: ‘The ineptitude of the board and manager [Woodford] means that shareholders are exposed to an investment company that is highly borrowed and holds a pile of highly illiquid stocks.
‘This is a very dangerous cocktail.’
The trust could be wound up in similar fashion to Equity Income with the money generated from asset sales returned to shareholders. But the trust’s illiquid portfolio means such a procedure could take a while – possibly even years – to complete.
‘The original concept of Patient Capital[ investing in start-up businesses] was brilliant,’ adds Brierley.
‘However, the execution has been catastrophic.’
When a new manager is appointed, Brierley also believes the trust’s chairwoman Susan Searle should stand down.
He describes her comment in 2017 that ‘there is often a misconception that unquoted assets are illiquid’ as ‘simply staggering’.
CITY WATCHDOG HAS TO SHOW ITS MUSCLE
THERE is no doubt that the Financial Conduct Authority has been asleep at the wheel while the Woodford debacle has mushroomed like a nuclear cloud. It now needs to take action against some of the parties involved.
1 At the very least Neil Woodford should be censured and fined for running investment portfolios that broke fund rules. He should also be banned from ever working again in financial services. Harsh but right, CBE or no CBE. Experts also believe Woodford could face class actions from investors who invested in Equity Income not knowing the fund was breaking rules (see point 5).
2 Hargreaves Lansdown must also be hauled over the coals and fined by the regulator for cont i nuing t o recommend Equity Income even when it knew the fund’s risk profile was changing for the worse. It knew about this deterioration as early as late 2017, raised it with Woodford, but did not think to alert investors (existing or new) so that they could decide whether the extra risk was one they were prepared to accept.
Experts believe Hargreaves Lansdown’s failure to warn customers now leaves it open to a possi ble cl ass l egal action f rom aggrieved investors.
3 The regulator also needs to ensure all best buy lists assembled by fund platforms such as Hargreaves Lansdown are now 100 per cent robust and not corrupted by commercial interests. Hargreaves Lansdown included Woodford Equity Income on its best buy list because it was in the best interests of both itself ( more funds under management, more fees, more profits) and Woodford (more money to manage, more revenues and profits for the directors).
These lists should now comprise all types of investment vehicle – not just funds. They should include active portfolios (run by managers) and passive or index tracking funds ( run by computers). Any platform abusing best buy lists should be fined.
Robin Powell, an investment campaigner, says platforms should be ‘transparent about their selection process and held accountable by the regulator’.
4 Link and Northern Trust were the overseers of Woodford Equity Income. Between them, they failed to protect the interests of investors as was their duty. They should be fined by the Financial Conduct Authority. 5 Equity Income’s downfall was investing in unquoted or illiquid stocks that could not then be sold quickly enough when investors wanted out of the fund. With no cash available to meet redemption requests, fund dealings had to be suspended. It is now blatantly obvious that open-ended funds – the likes of Equity Income and Income Focus – are unsuitable for the holding of big positions in unquoted and illiquid stocks including many listed on the AIM stock market.
Open-ended property funds shut their doors in 2016 because of liquidity issues, so it’s not a new problem. The regulator has been looking to tighten up the rules, but that’s not good enough. It needs to act now. Alan Miller believes ‘retail investors should not be allowed to invest in funds with unquoted holdings unless they have signed a waiver stating they have been made aware of the risk and are happy to proceed’.
6 The regulator should not allow any investment fund to pose as an equity income fund unless its overriding objective is to deliver investors a stream of dividend income. Woodford Equity Income was never an income fund and should have been labelled from the start Woodford UK Equity or Woodford UK Equity and Unquoted. Indeed, no fund should have a misleading label.
7 The regulator should look at putting limits on how much of a company a fund manager can own as well as limits on the amount a fund can hold in an individual stock.
8 Finally, the head of Andrew Bailey – chief executive of the Financial Conduct Authority – should roll.
Says Miller: ‘His position is untenable. On Woodford, the regulator is guilty of supervisory failure.’
Phil Case, an investment consultant, says: ‘Under Bailey’s watch, the regulator seemed to be asleep at the wheel. It is keen to fine other businesses but the biggest failure here is the FCA. Those who are guilty should all be sacked.’
Do YOU believe Neil Woodford should be required to return the £8.7 million of fees he took from Equity Income while it was suspended? If you are a Woodford Equity Income investor would you support a ‘class action’ lawsuit against him for breaking rules on exposure to unquoted companies? And if you bought the fund via Hargreaves Lansdown from late 2017 onwards, would you support a class action on the grounds that you were not given information that Hargreaves Lansdown had about the fund’s exposure? Let us know your views.