The Woodford Aftermath

The press reaction to the Woodford scandal has predictably generated more heat than light. The Financial Times said that Neil Woodford’s sacking will have consequences far beyond his own fate. It went on to say that the “crisis” has heightened concerns about liquidity and further tarnished investor confidence in active fund managers”. Tarring all active fund managers with the same brush as Woodford is sensationalism which unnecessarily alarms investors. What Woodford did bears little resemblance to what mainstream active mangers do. Below we outline the reasons why the Woodford debacle is a one-off event.

At its launch in 2014, the Woodford Equity Income fund was marketed on the basis of Neil Woodford’s stellar track record at Invesco Perpetual where he built his reputation in large cap income stocks. But unhindered by the risk controls at a large company like Invesco, he presumably felt he could make a similar impact in investing in experimental smaller companies, which is a different challenge entirely, which was somewhat underhand given the marketing effort was based on his historic track record. It was lax corporate governance that allowed him to change tack in this way.

Neil Woodford had a reputation as a star fund manager at Invesco but how much this is due to a stronger corporate governance structure to challenge him is worth consideration; because on his own his stock picks were dire. Because Woodford’s mainstream share selections were so dismal, it reduced the value of the listed component of the fund and redemption’s followed prompting further sales of liquid assets. In turn this increased the value of his unlisted shareholdings above the statutory limit. One way round this was to change the status of the unlisted companies by listing them on the moribund Guernsey stock exchange. Some would argue that this was a cynical move of a desperate man. But the game was up. In reality there was no way out of the death spiral of poor stock selections, redemptions and ever increasing burden of illiquid positions. The administrator Link Fund Solutions couldn’t find a way out either.

The final piece in this sorry jigsaw was the helping hand given by Hargreaves Lansdown who remained staunch cheerleaders of this poorly performing fund. Woodford’s fund continued presence in its Wealth 50 recommendations right up until the fund was gated will seriously undermine the credibility of this platform’s reputation for objectivity.

So what are the lessons to learn from this sorry tale?  Hubris, collusion,  ineptitude and weak corporate governance produced a perfect storm for the fund’s collapse.  But all the reasons for failure are company specific apart from Hargreaves Lansdown recommendations. So if you cannot rely on a large platform’s recommendations, it makes sense to seek independent financial advice to avoid the rotten apple. The one lesson that does not apply is the Financial Times’ panicky concerns for active fund management as a whole.

Brian Durrant