Stark truth of Woodford’s unwanted fund stockpile
It may take him 20 TIMES longer to shift than rivals. Now furious MPs ask the City watchdog: How could you have let this happen?
THE scale of the share-trading crisis that has humbled star fund manager Neil Woodford can be revealed today.
Figures that will pile pressure on City watchdog boss Andrew Bailey, who faces a grilling from MPs this week, show his £3.5billion Equity Income Fund would take almost 20 times longer to sell off than the next most ‘illiquid’ fund if every investor asked for their money back.
The data handed to The Mail on Sunday identified 15 major funds that own so-called illiquid shares that could be hard to trade in an emergency. On average, the fund managers – excluding Woodford – would take just over six weeks to sell all of their shareholdings.
In the worst cases among Woodford’s rivals, the research indicated that the Invesco High Income Fund, which Woodford used to manage, would take 19 months to sell off, the M&G Recovery fund 15 months and Woodford’s former Invesco Income fund nine and a half months.
Yet that paled in comparison to the astonishing 31 years it would take to sell off Woodford’s Equity Income Fund in its entirety. At the opposite extreme, Fundsmith – a fund managed by rival Terry Smith, who favours larger listed firms – would take just a few hours to sell off.
The analysis of 98 funds with assets over £1billion is theoretical and based on how often each share has been traded over the past six months.
The calculations presume the fund manager avoids a fire-sale by offloading shares at a steady pace, accounting for no more than a fifth of daily share trades in each company. The manager could sell more quickly, but that might mean getting a worse price on the trades.
Woodford’s sell-off would take longest because he holds so many shares in smaller specialist firms which are difficult to offload at short notice.
When it was suspended three weeks ago, just under 10 per cent of his Equity Income Fund shares were not listed on any stock exchange. Another 28 per cent were in tiny ‘micro-cap’ companies – some listed on obscure markets such as the Guernsey stock exchange – where trading is infrequent. And 43 per cent of the fund was in smaller companies, where shares often have fewer buyers.
By comparison, the Invesco High Income fund has no unlisted shares, 10 per cent in micro-cap firms and 27 per cent in small companies, according to data firm Morningstar. Other funds in the list hold even fewer hard-to-sell shares.
The crisis at Woodford’s poorlyperforming fund escalated because he was forced to sell shares to meet rising withdrawal requests from savers. That meant flogging larger, easier-to-sell holdings when he least wanted, which simultaneously left him overexposed to smaller stocks.
All the funds named in the research said the figures were hypothetical, insisted they had no liquidity concerns and said they could free up cash more quickly if required.
The findings, supplied by fund manager Alan Miller and based on figures from data firm Bloomberg, will be seized on as evidence that the City regulator left Woodford’s customers exposed to risks.
Financial Conduct Authority chief executive Bailey will on Tuesday face questions from Treasury committee chairwoman Nicky Morgan on the watchdog’s role in a scandal that has seen tens of thousands of investors blocked from accessing their savings.
The FCA has revealed it raised concerns about the Equity Income Fund’s investments in unlisted shares 16 months before it shuttered. Fund managers should hold no more than 10 per cent of their portfolio in these stocks. Woodford twice broke the limit before taking action to reduce his exposure. The FCA has now launched an investigation into the suspension. All the other funds, apart from Marlborough, said they own no unlisted holdings.
Alan Miller, who founded wealth manager SCM Direct, said anything over 100 days to wind up was a long time. ‘The numbers for Woodford are completely out of step with any other fund or anything that is reasonable,’ he said. ‘It is deeply disturbing and frankly grossly negligent that the FCA has not sought to change the rules to ensure that all mutual funds are able to meet redemption requests.’
Bailey’s showdown in Parliament is expected to inflict more damage to his bid to become the next Bank of England Governor. He had been the frontrunner to succeed Mark Carney, who leaves in January.
MPs are also expected to demand answers over the FCA’s handling of alleged misconduct at Royal Bank of Scotland and HBOS – where MPs say many bankers who drove small businesses to the wall have escaped punishment – and the collapse of investment firm London Capital & Finance, which left 11,000 savers £236 million out of pocket.
A Serious Fraud Office probe into the LCF failure has resulted in five arrests and it has emerged that the FCA was warned three years ago about related irregularities.
A spokesman for Woodford said: ‘The Bloomberg model is theoretical. For example, it estimated that it would take more than 150 days to sell a holding in the Woodford Equity Fund, which we sold recently within one day.’
A spokesman for Invesco said: ‘The programme on Bloomberg is not a meaningful calculation as there may be a tiny percentage within a fund which may take longer than the majority of the portfolio to liquidate.’
LET me ask you a couple of simple investment questions as you enjoy your Mail on Sunday on this (hopefully) splendid British summer day. They are not brain teasers as taxing as Sudoku, so please indulge me. Question one. If a financial expert asked you which of four investment funds all run by the same group – High Income, Income & Growth, Income, and UK Strategic Income – seemed to promise you the most attractive income based on its title, which one would you plump for?
High Income? For what’s it’s worth, I would also choose it.
Question two. If you were then asked which of the four is aimed primarily at delivering you a stream of juicy dividend income from a portfolio of UK equities that is better than that available from the stock market as a whole, which fund would you opt for?
Maybe High Income, despite no indication of a UK investment bent? Also Income, although with the same proviso? And, despite its rather pompous name, UK Strategic Income? At least it has UK in its name.
After a little contemplation, I would probably plump for the latter although my answer would not be as certain as that to question number one.
Well, you and me – we – would both be wrong. The answer to both questions is, in fact, Income & Growth. Bizarre? Yes. Well, welcome to the world of investment management, a multi-billion pound industry that manages our Isas and pension funds and in the process makes a fortune for its owners and employees – but often treats us as second-class citizens.
That is, investors they have no relationship with – and wish to have no bond with – because as far as they are concerned, we are customers of the online investment platforms we hold our shares and funds with (Hargreaves Lansdown et al).
The ‘crime’ sheet against the fund management industry is as long as a giraffe’s tail.
As above (more on that later), they run investment funds that fail to deliver what they suggest they will provide on the tin.
Indeed, look no further than Woodford Equity Income, a fund up to its muddy ankles in non-income producing unquoted companies despite its income label. Talk about mislabelling. Mutton dressed up as spring lamb.
Despite the acute difficulties investment managers can experience when selling illiquid fund holdings – such as unquoted compercentage
panies, private equity and direct property – many continue to hold them in unsuitable investment vehicles such as unit trusts and open-ended investment companies (jargon, jargon).
This invariably results in investor-pain when markets turn for the worse (think property funds and June 2016, think Woodford Equity Income this month).
It should not be allowed to happen. It shames the funds industry, with biggest losers (of course) being investors who are left in the dark as to when they can access their money and how little they will get back.
The sheet goes on. They levy management fees that, bar the odd exception, rarely get cut or do not take into account economies of scale – namely, that the resources involved in running a £200million fund are little different from running a £1billion portfolio, so the slice a fund manager creams off investors’ returns should fall accordingly.
Honourable exceptions include Vanguard and M&G that have both just announced reductions in fund charges – as well as a raft of stockmarket-listed investment trusts where independent boards have beaten down charges on behalf of investors. For example, from the start of next month, the £200million JPMorgan US Smaller Companies trust will see its one per cent annual management fee replaced by a tiered charge – 0.9 per cent on the first £100million and then 0.75 per cent on any surplus.
Back to the crime list. Many investment houses also levy other charges against the assets of the funds we invest in, all reducing our investment gains or further deepening our losses.
Although funds are compelled to quote in their literature a so-called