A Year on and Woodford Investors Still Wait for Their Cash

It is a year since ‘star’ fund manager Neil Woodford lost his sparkle, and his eponymous Equity Income fund was suspended as a slew of investors tried to withdraw their investments over concerns the fund was overweighting in illiquid investments.

If you put ‘Woodford’ into the search box on DIY Investor, the entire saga plays out from the manager’s days in the sun with ‘rock-star’ status to discredited charlatan; many of those investors are still waiting for their funds.

Fallout from the debacle has been wide ranging and has focussed on fund manager processes, focus on performance over what lies beneath, criticism of ‘best-buy’ lists, the wisdom of holding illiquid assets in an open ended fund structure, lack of transparency and much criticism of the winding up process.

Director at data analysts Morningstar, Jonathan Miller, told What Investment: ‘There is still around half a billion pounds worth of assets sitting in what remains of the illiquid part of Neil Woodford’s ill-stricken portfolio. Given the difficulty in valuing these assets and the current market environment, it’s anyone’s guess as to how long it will take to offload the remainder of the assets. It is a sorry state of affairs as investors look to get their savings out.

‘half a billion pounds worth of assets sitting in what remains of the illiquid part of Neil Woodford’s ill-stricken portfolio’

‘Over the last couple of years, we have been having more meaningful discussions with fund managers using our proprietary data in areas such as capacity, their ownership stakes in companies, and their ability to exit positions based on trading volume. This has helped to provide a full picture of the liquidity profile of their funds, and to help identify any potential future issues in portfolios. The good news for investors however is that outside of the Woodford portfolio, our belief is that there is no real widespread issue of unquoted assets being held in UK domiciled funds. The current liquidity profile of equity funds – based on the tools Morningstar has developed over the last few years – show that this is not a systemic issue and we’re not on the edge of something big that is about to take hold across the industry.

‘The Woodford story is a reminder that boutique fund houses where the founder is also the key portfolio manager calling the shots need to have the right processes in place when it comes to capacity and risk management. The interests of current investors needs to come first and while there are a number of positives around boutiques, the concept of putting a star fund manager up in lights is waning. More is being made of the investment team, the supporting cast and how decision-making takes place.’

In response, Jason Hollands, MD at Tilney Investment Management Services said there are many lessons to be learned from the Woodford saga and that it is vital to look beneath the bonnet and not just put blind faith in a big-name manager.

‘Woodford unusually disclosed the full holdings of the fund, so the brewing issues around the changing shape of the fund and potential liquidity problems were there for all to see. This is why we dropped this fund and issued a sell on it in early 2018,’ says Hollands.

‘Being able to see a clear process and then monitor adherence to it is much more important than a cult of personality. Woodford built his career as an investor in FTSE 350, dividend paying stocks and had a reputation as a defensive investor. The extreme style drift under his own boutique was notable as the fund became increasingly focused on smaller companies and early stage growth stocks – many of which paid no dividends – which was inappropriate for a fund badged as an income product and where his track record as investor was unclear.’

Hollands told What Investment that in the past it has been too easy to assume that when a manager leaves a large firm and breaks out in their own, this will be a recipe for success, somehow unleashing them from the perceived constraints that come with bigger firms.

‘The Woodford saga rams home the need to avoid such lazy assumptions’

‘The Woodford saga rams home the need to avoid such lazy assumptions. When managers move into a very different environment, it is vital to understand what will change, what resources and control mechanisms they will have around them and form a view on how well a manager might adapt to this. This is especially the case where a manager may have spent decades at a particular employer and be somewhat unproven working in a different environment. Boutiques have become fashionable over the years, but larger firms do provide infrastructure and discipline. Importantly managers, risk teams and colleagues are there to challenge, question and debate decisions. This might be seen by some as a nuisance factor, but actually can help stop problems developing early on.’

Hollands believes distraction is another factor.

‘Here you have a manager, running his own business, where his name is above the door and as lead manager on every product, branching out into early stage investing with the Patient Capital Trust and also adding a fund with a more global remit in Income Focus. That is a vast expansion in the opportunity set for a manager to be looking at and early stage investing, in particular, requires considerable time and due diligence. Investors need to be vigilant of managers who become too thinly spread and might be losing focus on their core competency.’

Mr Hollands says that liquidity is extremely important and is not comfortable seeing unquoted positions in open ended funds with daily dealing.

‘This may not have seemed an issue on a multi-billion fund, but when outflows are accelerating it can soon become one. However, the presence of unquoted positions wasn’t the sum of the liquidity challenges. This fund also had sizeable ownership of a new number of very small, AIM listed stocks. Such positions cannot be liquidated in a hurry.’

This story still has some way to go, including a large number of outstanding complaints to the Financial Ombudsman, and DIY Investor will continue to deliver regular updates in the sincere hope that serious lessons are learned.