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

Amid recriminations and finger pointing from all quarters, one thing is for sure, levels of awareness of the machinations of the fund industry, and some of the perils therein, will have been elevated to new highs following the Woodford debacle.

They may not be the headlines he would have been hoping for, but today’s papers are crammed with stories from those that apparently knew what was going on, those that suspected what was going on, and inevitably pictures of glum investors that stand to lose their shirts.

If Mr Woodford concurs with Oscar Wilde that the only thing worse than being talked about is not being talked about, he will no doubt be chuffed to bits that he has even been the subject of questions in the House.

However, the collateral damage is far-reaching and will do little to engender trust in the financial services industry so recently rocked by the £236m London Capital & Finance collapse; chair of the Treasury select committee Nicky Morgan is being urged to take a very close look at the behaviour of the Financial Conduct Authority, and DIY investing giant Hargreaves Lansdown has been hit where it hurts for its unswerving support for a fund that was clearly in distress as its shares have shed 22% in a month.

‘the collateral damage is far-reaching and will do little to engender trust in the financial services industry’

However, other brokers that offer ‘best-buy’ lists of funds such as AJ Bell will also come under scrutiny as will independent analysts which reacted at varying speeds to the increasingly pessimistic position emerging.

Tilney Bestinvest was one that reacted quickly and decisively; MD Jason Hollands, said: ‘We removed this fund from the Bestinvest Premier Selection fund list in December 2017 and put it under review. In March 2018, we downgraded it to a ‘sell’ and in January this year we called this fund as a ‘Dog’.

Bestinvest was very clear in raising its concerns about the changing characteristics of this fund and consequently had little client exposure by the time the fund gated, unlike some others; what is certain is that the way in which these lists of favourites are compiled and promoted will come under very close scrutiny, as will any links between them and the way in which the platforms are remunerated.

‘Hargreaves Lansdown has been hit where it hurts for its unswerving support for a fund that was clearly in distress as its shares have shed 22% in a month’

Gavin Fielding of Fundscape said: ‘Fund selectors bear a ‘huge’ responsibility. Were investment-naive customers ‘sold’ the fund without appropriate due diligence, i.e. simply buying a name or following the herd? At what point does the manager, or the advisers and researchers who recommended, promoted and validated the funds bear any responsibility?’

In a similar vein, Martin Bamford, MD of Informed Choice told Portfolio Adviser: ‘There’s an opportunity in all of this mess to challenge important issues around the distinction between guidance and advice, with many followers of the Wealth 50 list appearing to have treated it as advice to invest in this and other funds.

‘There’s an opportunity in all of this mess to challenge important issues around the distinction between guidance and advice’

As the ripples spread, in a recent update on his £7bn Lindsell Train UK Equity fund, manager Nick Train has sought to prepare investors for a potential future ‘period of underperformance’ as a result of the high concentration of holdings in the vehicle; this is likely to just be the start of it, but if one result is a better educated and informed investor base, that may be no bad thing.

Now a senior Bank of England official has waded into the debate with a seemingly Funds 101-level statement that equity funds that stick to blue-chip shares cope best with calls from investors for their money back.

The Old Lady’s executive director for financial stability, Alex Brazier, said the more illiquid or difficult to trade the assets in a fund were, the more aggressively its investors withdraw their funds as prices of the assets fall.

‘When a fund holds assets traded almost instantly on exchange – like blue-chip equities – investors tend to sit on their hands,’ Brazier said, ‘Liquidity isn’t costless.

Last week the fund industry’s former poster boy suspended his Woodford Equity Income Fund as investors headed for the exit and prompted by a chunky withdrawal request from Kent County Council’s pension fund; it appears that illiquid assets were placed in a Guernsey-based special purpose vehicle that was then purchased by the fund.

If this has been Woodford’s special sauce, it is likely to attract the very close attention of the FCA and may have a number of fund managers looking to exit positions without attracting too much attention; greater transparency is likely to be demanded from all quarters in the future.

Without specifically referencing Woodford, Mr Brazier continued:  ‘Of course, redemptions can be suspended – funds can be gated – to limit the selling pressure. But such measures are a double-edged sword. They can allow time for an orderly re-structuring of a fund, avoiding unnecessary fire sale pressure, but the expectation that such measures could be imposed tomorrow can create an incentive to be at the front of the redemption queue today,’

The FCA is finalising rules for funds investing in illiquid assets, but according to Mr Brazier, it is also a global issue: ‘Macroprudential authorities across the world will need to review new global asset management rules. An assessment is needed of whether they will be effective in dampening any restriction to the supply of finance during economic downturns.’

He said Britain’s big current account deficit represented its biggest underlying economic vulnerability, recalling how BoE Governor Mark Carney has previously warned of the reliance on ‘the kindness of strangers’.

It seems that this saga will run and run but if the net result is that investors are more engaged, better educated and able to make informed investment decisions that will sit comfortably with DIY Investor.