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Dec
2019
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5 lessons learnt from the Woodford scandal

From superstar status to ruins in less than five years – it’s been six months since Neil Woodford’s flagship investment fund went into meltdown.

Let’s recap on what happened.

On the 4th June 2019, the fund manager suspended trading of the Woodford Equity Income Fund, sparked by a mass exodus of investors frustrated with poor performance.

As the assets under management quickly shrunk the composition of the fund shifted significantly. The proportion of illiquid assets (which by definition are extremely difficult to sell quickly for their full value) rose so much it broke the Financial Conduct Authority’s rules on how much can be held.

Kent County Council’s request to withdraw £260 million was the straw that broke the camel’s back. The fund was in lockdown – no money in, but most significantly, no money out.

The fund suspension spelt the beginning of the end for Woodford Investment Management. Now in administration, the Equity Income Fund is closed, and investors are highly unlikely to get any money back until mid-2020, if not later. They can also expect a significant loss.

In an especially troubling time for Woodford investors, there are five lessons we can learn from the scandal:

1. Don’t get caught up in the hype

After 25 years of market-beating returns at Invesco Perpetual, Woodford set up his fund house in 2014. He had made quite a name for himself – his reputation as star fund manager made him a household name in some circles.

When Woodford set up his fund, he said his best investments were yet to come! People were buying off the back of praising press and friend ‘recommendations’. At its peak, the fund had more than £10 billion of investors wealth. When the fund was suspended it was worth just £3.7 billion. Figures quoted by the BBC in June state that the fund made a total return of just 0.36% since its launch.

2. You need truly independent advice

Hargreaves Lansdown famously promoted Woodford. Despite the fund’s poor performance, they championed the Equity Income Fund in their Wealth 50 list of favourites over better-performing rivals. The big problem with ‘best buy’ lists is that they are only a marketing and sales tool, not a recommendation and certainly not truly independent. Ultimately, they don’t know your circumstances, risk profile or goals – they really don’t know what is best for you.

Hargreaves Lansdown themselves were one of the biggest investors in Woodford Equity Income, having £621 million invested through its six multi-manager portfolios. In fact, the HL Multi-Manager Income & Growth fund has 14% of its portfolio in the fund.

The relationship between Woodford and Hargreaves Lansdown continues to be questioned to this day. In September, even Peter Hargreaves, who owns 32% of the business that bears his name, said to the Sunday Times “It’s annoyed the hell out of me that it would appear he [Woodford] has not been truthful with Hargreaves Lansdown. But it’s also annoyed me that they [Hargreaves Lansdown] let it go on so long.”

3. You must diversify

No matter how diversified the underlying assets of a particular fund are, if you invest heavily in a single fund or even an individual investment manager, you still have your eggs in one basket.

No matter Woodford’s previous track record, evidently nobody can consistently outperform the market. As a result, diversifying your portfolio across several investments, with various risk profiles, is important for handling volatility while delivering growth.

4. Regulation isn’t always fit for purpose

Passionate about investing in UK start-up businesses, they ultimately made up a substantial proportion of the Equity Income portfolio, due in part thanks to the high demand for withdrawals and poorly performing FTSE investments.

As a result, early in 2018 Woodford started to take drastic measures to change the shape of the portfolio. By listing unquoted, illiquid assets on the Guernsey Stock Exchange it meant the fund would remain within Financial Conduct Authority’s (FCA) rules.

FCA boss Andrew Bailey was quoted as saying “We view incidents like the Woodford affair as an example of firms who are following the letter, but not the spirit, of the rules. It raises questions about the rules themselves.”

Since, the FCA have firm new rules for certain open-ended funds investing in inherently illiquid assets, due to come in to come into effect at the end of September 2020. In the meantime, it might be wise to further scrutinise your portfolio’s underlying assets.

5. Regular reviews are essential

An investigation by the Sunday Times found the position of the Equity Income Fund had changed since launch. In March 2019, less than 20% of the assets held were in FTSE 100 companies. This compares to the 50% it held initially before Woodford pursued investments in start-ups and smaller firms. This dramatically altered the risk profile of the fund.

Regularly reviewing the performance and risk profile of your investments is crucial. Naturally, a dip in investment values isn’t an immediate red flag and signal to invest elsewhere, but it’s important to understand when and why a fund composition may change so dramatically.

Here to help

If you’ve been caught up in the Woodford woes or would like to discuss the composition of your investment portfolio, don’t hesitate to get in touch – 07769 156 250.

 

The value of your investment can go down as well as up and you may not get back the full amount invested.

 

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