DIY Investor - The Do-It-Yourself Investing Blog

Investors trapped in Neil Woodford’s former flagship Equity Income fund, awaiting a final valuation of its assets, have been left exasperated by the former rock star stock picker and his business partner Craig Newman bagging £13.8m in dividends from their investment management company in the year before it collapsed.

The final valuation of the fund will occur on 17^th January, which starts the winding-up process and will reveal how much money investors will get back — and how much they will have lost.

Link Fund Solutions, which administers the fund, informed 300,000 investors that they would start receiving their money from January 30^th, ten days later than previously announced.

It said that selling the remaining assets was proving more difficult than expected; due to the high costs of unwinding, it has been suggested that investors would get back between 60p and 70p for every £1 they have remaining in the fund.

‘suggested that investors would get back between 60p and 70p for every £1 they have remaining in the fund’

‘The change to the timetable is required to ensure that investors retain exposure to the equity market for the entire period prior to the fund being wound up as required by the regulations,’ Link said.

‘This delay also allows for a significant portion of the fund’s holdings in money market instruments to be liquidated in a way that minimises costs to the fund.’

BlackRock has been charged with selling down the fund’s listed stocks and investors are set to receive nearly two-thirds of their holdings back at the end of this month; £1.9bn has been raised from sales to date, representing 63% of the fund’s assets

Once worth more than £10bn, Woodford’s fund fell below £3bn as investors rushed to the exit after a series of poorly performing stock picks, including the online estate agent Purplebricks and doorstep lender Provident Financial.

Woodford has remained unrepentant despite being heavily criticised for continuing to charge management fees after the fund was gated last June; in its full-year accounts, the company blamed press coverage for the fund’s demise as well as poor stock-picking.

A spokesperson said: ‘The accounts relate to the financial year before the equity income fund was suspended. We can confirm that the partners did not take any profits or income during the fund’s suspension, nor was any management fee earned from managing Woodford Patient Capital Trust.’

The role played by Hargreaves Lansdown in promoting Woodford’s funds has also attracted much criticism, and has called into question the way in which ‘best buy’ funds lists are compiled and operated.

‘The role played by Hargreaves Lansdown in promoting Woodford’s funds has also attracted much criticism’

The lines between what constitutes financial advice, and what is ‘guidance’ are blurred and interpreted in different ways by investment platforms; selecting a fund because it is flagged as ‘recommended’ could be construed as advice if the investor believes it to be so.

Certainly the FCA has a key role to play in ensuring that in the future it is absolutely transparent as to how ‘best buy’ lists are constructed and what commercial arrangement underpins them; Hargreaves Lansdown has waived its fee for anyone invested in the Woodford fund, but is now facing legal action from disgruntled investors.

As many as 3500 investors are pondering possible claims against Mr Woodford, his investment company, the supervisor of his funds and the platforms and advisers that recommended and marketed the discredited stock picker’s operation.

Unsurprisingly there is fury amongst those that face heavy losses; IT Consultant Ian Flaherty, who invested £10,000 in the fund told the Guardian: ‘It’s absolutely despicable but not a surprise. I think he should make a contribution to the repayment that goes to people and certainly the dividend that he paid himself from performance of his own company. Quite frankly, I would like to see him in a court of law.’

Construction engineer Craig Orrell, said the fund’s collapse was ‘sickening’, believing that Woodford ‘should return the dividend to the fund, or at least give something back’; HR consultant Clive Dunn of Ilkley said Woodford and Newman’s dividends represented ‘a pretty disgusting amount of money’ adding ‘everyone needs to get paid, but taking money out when he knew things were turning sour, morally he must have questioned whether that was right.’

‘Quite frankly, I would like to see him in a court of law’

Inevitably there will be calls for greater regulation of investment schemes, but however distasteful, it is largely accepted that Woodford’s fees were made clear up front; the remit of City watchdog, the Financial Conduct Authority, does not include setting profit levels for firms.

A spokesman for FCA said: ‘We have clearly set out the actions we have taken in relation to Woodford in detailed correspondence to the Treasury select committee and have nothing further to add at this stage. We continue to investigate the activities that led to the suspension of the Woodford equity income fund.’

However loud the clamour for Mr Woodford to ‘do the right thing’, or possibly donate a large sum to charity, that seems a pretty remote possibility; maybe the single minded pursuit of money is what fuelled his success over a long career and allowed a large number of investors to make a lot of money along with him.

‘the ripples and recriminations are likely to taint the financial services sector well into the future’

Clearly it has not ended well, and the ripples and recriminations are likely to taint the financial services sector well into the future; it is to be hoped that whatever safeguards are put in place they prevent people from giving up on managing their money.

Nobody is going to be comfortable sitting on such potential losses, but the real long-term harm would be if people were so disillusioned that they turn their back on investing altogether.

In the meantime, Anne Richards, chief executive of £330bn asset manager Fidelity International, has backed an overhaul of the rules governing investment funds saying the collapse of Woodford Investment Management has sparked a big debate in the fund industry around the issue of liquidity — how easy it is to sell assets at a fair price — and fund structures.

Several other open-ended funds, which are meant to allow investors to withdraw their cash daily, also suspended trading in 2019, after Woodford tried to prevent large numbers of investors withdrawing their money and thereby potentially driving down asset values.

Outgoing governor of the Bank of England, Mark Carney, pulled few punches when he told a parliamentary inquiry that such funds were ‘built on a lie’.

Speaking to the FT, Ms Richards said there were now questions over ‘when is an open-ended structure a good structure and when does an open-ended structure need to have some mitigating factors around it depending on the underlying assets’.

She said that for listed securities, there had long been ‘a hidden assumption’ that ‘assumes liquidity will always be there when you need it. I think that has been called into question.’

Discussions are under way around creating a set of rules for open-ended funds when market conditions ‘are not normal’ – possibly to be more explicit when daily dealings are no longer appropriate.

‘liquidity mismatch — the difference in time it takes to sell an asset at a fair price and the redemption period offered to investors’

Ms Richards also raised concerns about asset managers using open-ended funds for unlisted assets, such as property after M&G stopped withdrawals from its £2.5bn property fund, sparking a wave of fresh questions about whether assets such as property, which can take months to sell, should be placed in open-ended structures.

The FCA has also been examining this liquidity mismatch — the difference in time it takes to sell an asset at a fair price and the redemption period offered to investors – and several asset managers have increased their checks on difficult to sell assets to try to reassure investors afeared of high-profile liquidity crunches.

Ms Richards told the FT that Fidelity used the Woodford issues as a test case, running its portfolio through its own systems to check when ‘red flags’ would have been raised: ‘It was clear that our [liquidity] limits were way, way, way lower than we saw in the Woodford portfolio. We have nothing that is even close in terms of the liquidity profile of the Woodford fund,’ she said. ‘It gave us a real-life test case to put through the processes we have to give ourselves assurances that we are as alive to the issue as we need to be.’

With such scrutiny, it can only be hoped that investors will be able to face the future with renewed confidence; liquidity is certain to be an ongoing issue for the asset managers, but the investment platforms are sure to be in the cross-hairs as well as they will surely have to be more transparent when it comes to their best buy lists, and the regulator is certain to require proof positive that the products they offer to their clients are appropriate to their individual need and level of sophistication and knowledge.

The process is likely to be long, and may not be pretty, but by the end there should be a set of rules that offer investors greater transparency and protection, and that sits comfortably with DIY Investor.

See more:

DIY investors desert Woodford as Equity Income fund is downgraded

Woodford down to earth with a bump as fund is suspended

Hedgies circle Woodford fire sale; HL boss apologises

Hargreaves Lansdown under pressure as Woodford fall-out continues

Woodford fallout: FCA, platforms and analysts to be probed; BoE boss says choose blue-chip stocks for liquidity

FCA asleep at the wheel as Woodford ‘does an Arch Cru’?

Woodford Equity Income: Too big to fail

Woodford Equity Income Fund; People are missing the point!

Woodford – fund suspended until Dec; faces sack from WPCT

Focus on Funds: More questions than answers at Woodford

Woodford faces the push after £232m write-down